Participation by Disadvantaged Business Enterprises in Department of Transportation Programs

SUMMARY: This final rule revises the Department of Transportation's

regulations for its disadvantaged business enterprise (DBE) program.

The DBE program is intended to remedy past and current discrimination

against disadvantaged business enterprises, ensure a ``level playing

field'' and foster equal opportunity in DOT-assisted contracts, improve

the flexibility and efficiency of the DBE program, and reduce burdens

on small businesses. This final rule replaces the former DBE

regulation, which now contains only the rules for the separate DBE

program for airport concessions, with a new regulation. The new

regulation reflects President Clinton's policy to mend, not end,

affirmative action programs. It modifies the Department's DBE program

in light of developments in case law requiring ``narrow tailoring'' of

such programs and last year's Congressional debate concerning the

continuation of the DBE program. It responds to comments on the

Department's December 1992 notice of proposed rulemaking (NPRM) and its

May 1997 supplemental notice of proposed rulemaking (SNPRM).

DATES: This rule is effective March 4, 1999. Comments on Paperwork

Reduction Act matters should be received by April 5, 1999; however,

late-filed comments will be considered to the extent practicable.

ADDRESSES: Persons wishing to comment on Paperwork Reduction Act

matters (see discussion at end of preamble) should send comments to

Docket Clerk, Docket No. OST-97-2550, Department of Transportation, 400

7th Street, SW., Room 4107, Washington, DC 20590. We emphasize that the

docket is open only with respect to Paperwork Reduction Act matters,

and the Department is not accepting comments on other aspects of the

regulation. We request that, in order to minimize burdens on the docket

clerk's staff, commenters send three copies of their comments to the

docket. Commenters wishing to have their submissions acknowledged

should include a stamped, self-addressed postcard with their comments.

The docket clerk will date stamp the postcard and return it to the

commenter. Comments will be available for inspection at the above

address from 10 a.m. to 5:00 p.m., Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Robert C. Ashby, Deputy Assistant

General Counsel for Regulation and Enforcement, Department of

Transportation, 400 7th Street, SW., Room 10424, Washington, DC 20590,

phone numbers (202) 366-9306 (voice), (202) 366-9313 (fax), (202) 755-

7687 (TDD), [email protected] (email); or David J. Goldberg, Office

of Environmental, Civil Rights and General Law, Department of

Transportation, 400 7th Street, SW., Room 5432, Washington, DC 20590,

phone number (202) 366-8023 (voice), (202) 366-8536 (fax).

SUPPLEMENTARY INFORMATION:

Background

The Department has the important responsibility of ensuring that

firms competing for DOT-assisted contracts are not disadvantaged by

unlawful discrimination. For eighteen years, the Department's most

important tool for meeting this responsibility has been its

Disadvantaged Business Enterprise (DBE) program. This program began in

1980. Originally, the program was a minority/women's business

enterprise program established by regulation under the authority of

Title VI of the Civil Rights Act of 1964 and other nondiscrimination

statutes that apply to DOT financial assistance programs. See 49 CFR

part 23.

In 1983, Congress enacted, and President Reagan signed, the first

statutory DBE provision. This statute applied primarily to small firms

owned and controlled by minorities in the Department's highway and

transit programs. Firms owned and controlled by women, and the

Department's airport program, remained under the original 1980

regulatory provisions. In 1987, Congress enacted, and President Reagan

signed, statutes expanding the program to airports and to women-owned

firms. In 1991 (for highway and transit programs) and 1992 (for airport

programs), Congress enacted, and President Bush signed, statutes

reauthorizing the expanded DBE program.

After each statutory amendment, and at other times to resolve

program issues, the Department amended part 23. The result has been

that part 23 has become a patchwork quilt of a regulation. In addition,

years of interpretation by various grantees and different DOT offices

has created confusion and inconsistency in program administration.

These problems, particularly in the area of certification, were

criticized in General Accounting Office reports. The Department's

desire to improve program administration and make the rule a more

unified whole led to our publication of a December 1992 notice of

proposed rulemaking (NPRM).

The Department received about 600 comments on this NPRM. The

Department carefully reviewed these comments and, by early 1995, had

prepared a draft final rule responding to them. However, in light of

the Supreme Court's June 1995 decision in Adarand v. Pena and the

Administration's review of affirmative action programs, the Department

conducted further review of the DBE program. As a result, rather than

issuing a final rule, we issued a supplemental notice of proposed

rulemaking (SNPRM) in May 1997. This SNPRM incorporated responses to

the comments on the 1992 NPRM and proposed further changes in the

program, primarily in response to the ``narrow tailoring'' requirements

of Adarand. We received about 300 comments on the SNPRM. The Department

has carefully considered these comments, and the final rule responds to

them. The final rule also specifically complies with the requirements

that the courts have established for a narrowly tailored affirmative

action program.

At the same time that the Department was working on this final

rule, Congress once again considered reauthorization of the DBE

program. In both the House and the Senate, opponents of affirmative

action sponsored amendments that would have effectively ended the

program. In both cases, bipartisan majorities defeated the amendments.

The final highway/transit authorization legislation, known as the

Transportation Equity Act for the 21st Century (TEA-21), retains the

DBE program. In shaping this final rule, the Department has listened

carefully to what both supporters and opponents of the program have

said in Congressional debates.

Key Points of the Final Rule

This discussion reviews and responds to the SNPRM comments and the

Congressional debates on certain key issues. Congressional debate

references are to the Congressional Record for March 5 and 6, 1998, for

the Senate debate and April 1, 1998, for the House debate, unless

otherwise noted.

[[Page 5097]]

1. Quotas and Set-Asides

SNPRM Comments: Most comments on this issue came from non-DBE

contractors, who argued that the program was a de facto quota program.

Many of these contractors said that recipients insisted that they meet

numerical goals regardless of other considerations, and that the

recipients did not take showings of good faith efforts seriously. Some

non-DBE contractor organizations argued, in addition, that the program

was a quota program because it was based on a statute that had a 10

percent target for the use of businesses defined by a racial

classification.

Congressional Debate: Opponents of the DBE program generally

asserted that it created quotas or set-asides. Senator McConnell

described the entire program, particularly the provision that ``not

less than 10 percent'' of authorized funds go to DBEs, as

* * * a $17.3 billion quota. In other words, if the government

decides that you are the preferred race and gender, then you are

able to compete for $17.3 billion of taxpayer-funded highway

contracts. But, if you are the wrong race and gender, then--too

bad--you can't compete for that $17 billion pot. (S1936).

The ``not less than 10 percent'' language also led opponents, such as

Senator Ashcroft, to label the program a ``set-aside,'' (S1405), a term

also employed in testimony provided by a law professor from California

who said that the statute ``imposes a set-aside that's required

regardless of the availability of race-neutral solutions.'' (S1407).

Senator Gorton said that the DBE statute provides that ``those not

defined as disadvantaged in our society are absolutely barred and

prohibited from getting certain governmental contracts.'' (S1415).

On the other hand, supporters of the program were adamant that it

was not a quota program. Senator Baucus argued that the program, as

implemented by DOT, allows substantial flexibility to recipients and

contractors. Recipients could have an overall goal other than 10

percent under current rules, he pointed out. Senator Kerry of

Massachusetts added that what the statute does is to ``set a national

goal. And it is appropriate in this country to set national goals for

what we will do to try to break down the walls of discrimination. * *

*'' (S1408). He also alluded to the flexibility of the Secretary to

permit overall goals of less than 10 percent. Senator Robb stated:

I want to stress at the outset that this program is not a

``quota program,'' as some have suggested. There is a great

difference [between] an aspirational goal and a rigid numerical

requirement. Quotas utilize rigid numerical requirements as a means

of implementing a program. The DBE program uses aspirational goals.

(S1425).

With respect to individual contract goals, Senator Baucus said,

``once a goal is established for a contract, each contractor must make

a good-faith effort to meet the goal--not mathematically required, not

quota required, but a good faith effort to meet it.'' (S1402). Senator

Baucus pointed to provisions of the SNPRM concerning overall goals,

means of meeting them, and good-faith efforts as further narrowly

tailoring the program. The SNPRM confirms, he said, that ``contract

goals are not binding. If a contractor makes good faith efforts to find

qualified women or minority-owned subcontractors, but fails to meet the

goal, there is no penalty.'' (S1403). Senator Robb added that

``Contract goals are not operated as quotas because they require that

the prime contractor make `good faith efforts' to find DBEs. If a prime

contractor cannot find qualified and competitive DBEs, the goal can be

waived.'' (S1425).

One of the Senators who addressed the quota/set-side issue in the

most detail was Senator Domenici. He concluded that ``I do not agree

that this minority business program we have in this ISTEA bill before

us is a program that mandates quotas and mandates set-asides.''

(S1426). He made this statement, in part, on the basis of March 5,

1998, letter to him signed by Secretary of Transportation Rodney Slater

and Attorney General Janet Reno. In relevant part, this letter (which

Senator Domenici inserted into the record) read as follows:

The 10 percent figure contained in the statute is not a

mandatory set aside or rigid quota. First, the statute explicitly

provides that the Secretary of Transportation may waive the goal for

any reason * * * Second, in no way is the 10 percent figure imposed

on any state or locality * * * Moreover, state agencies are

permitted to waive goals when achievement on a particular contract

or even for a specific year is not possible. The DBE program does

not set aside a certain percentage of contracts or dollars for a

specific set of contractors. Nor does the DBE program require

recipients to use set-asides. The DBE program is a goals program

which encourages participation without imposing rigid requirements

of any type. Neither the Department's current nor proposed

regulations permit the use of quotas. The DBE program does not use

any rigid numerical requirements that would mandate a fixed number

of dollars or contracts for DBEs. (S1427).

The debate in the House proceeded in similar terms. Opponents of

the DBE program, such as Representative Roukema (H2000), Representative

Cox (H2004) and Speaker Gingrich (H2009) said the legislation

constituted a quota, while proponents, such as Representatives Tauscher

(H2001), Poshard (H2003), Bonior (H2004) and Menendez (H2004) said the

program did not involve quotas or set-asides.

DOT Response: The DOT DBE program is not a quota or set-aside

program, and it is not intended to operate as one. To make this point

unmistakably clear, the Department has added explicitly worded new or

amended provisions to the rule.

Section 26.41 makes clear that the 10 percent statutory goal

contained in ISTEA and TEA-21 is an aspirational goal at the national

level. It does not set any funds aside for any person or group. It does

not require any recipient or contractor to have 10 percent (or any

other percentage) DBE goals or participation. Unlike former part 23, it

does not require recipients to take any special administrative steps

(e.g., providing a special justification to DOT) if their annual

overall goal is less than 10 percent. Recipients must set goals

consistent with their own circumstances (see Sec. 26.45). There is no

direct link between the national 10 percent aspirational goal and the

way a recipient operates its program. The Department will use the 10

percent goal as a means of evaluating the overall performance of the

DBE program nationwide. For example, if nationwide DBE participation

were to drop precipitously, the Department would reevaluate its efforts

to ensure nondiscriminatory access to DOT-assisted contracting

opportunities.

Section 26.43 states flatly that recipients are prohibited from

using quotas under any circumstances. The section also prohibits set-

asides except in the most extreme circumstances where no other approach

could be expected to redress egregious discrimination. Section 26.45

makes clear that in setting overall goals, recipients aspire to

achieving only the amount of DBE participation that would be obtained

in a nondiscriminatory market. Recipients are not to simply pick a

number representing a policy objective or responding to any particular

constituency.

Section 26.53 also outlines what bidders must do to be responsive

and responsible on DOT-assisted contracts having contract goals. They

must make good faith efforts to meet these goals. Bidders can meet this

requirement either by having enough DBE participation to meet the goal

or by documenting good faith efforts, even if those efforts did not

actually achieve the

[[Page 5098]]

goal. These means of meeting contract goal requirements are fully

equivalent. Recipients are prohibited from denying a contract to a

bidder simply because it did not obtain enough DBE participation to

meet the goal. Recipients must seriously consider bidders'

documentation of good faith efforts. To make certain that bidders'

showings are taken seriously, the rule requires recipients to offer

administrative reconsideration to bidders whose good faith efforts

showings are initially rejected.

These provisions leave no room for doubt: there is no place for

quotas in the DOT DBE program. In the Department's oversight, we will

take care to ensure that recipients implement the program consistent

with the intent of Congress and these regulatory prohibitions.

2. Sanctions for Recipients Who Fail To Meet Overall Goals

SNPRM Comments: The issue of sanctions for recipients who fail to

meet overall goals was not a subject of comments on the SNPRM. Since

the Department has never imposed such sanctions, this absence of

comment is not surprising.

Congressional Debate: DBE program opponents asserted, in connection

with their argument that the DBE program is a quota program, that the

Department could impose sanctions for failure to meet goals. ``The

goals have requirements and the real threat of sanctions,'' Senator

McConnell said. (S1488). Citing a provision of a Federal Highway

Administration (FHWA) manual saying that if ``a state has violated or

failed to comply with Federal laws or * * * regulations,'' FHWA could

withhold Federal funding, Senator McConnell said,

In other words, there are sanctions. The same threats appear in

* * * the Federal transportation regulations * * * When the Federal

government is wielding that kind of weapon from on high, it does not

have to punish them. A 10 percent quota is still a quota, even if

the States always comply and no one is formally punished. (Id.)

Defenders of the DBE program pointed out that the Department had

never punished a recipient for failing to meet an overall goal (e.g.,

Rep. Tauscher, H2001; Senator Boxer, S1433). Senator Domenici asked

Secretary Slater and Attorney General Reno whether there are sanctions,

penalties, or fines that may be (or ever have been) imposed on a

recipient who does not meet DBE program goals. He entered the following

reply in the record:

No state has ever been sanctioned by DOT for not meeting its

goals. Nothing in the statute or regulations imposes sanctions on

any state recipient that has attempted in good faith, but failed, to

meet its self-imposed goals. (S1427).

Senator Lieberman added that if states fail to meet their own goals,

``there is no Federal sanction or enforcement mechanism.'' (S1493).

DOT Response: The Department has never sanctioned a recipient for

failing to meet an overall goal. We do not intend to do so. To

eliminate any confusion, we have added a new provision (Sec. 26.47)

that explicitly states that a recipient cannot be penalized, or treated

by the Department as being in noncompliance with the rule, simply

because its DBE participation falls short of its overall goal. For

example, if a recipient's overall goal is 12 percent, and its

participation is 8 percent, the Department cannot and will not penalize

the recipient simply because its actual DBE participation rate was less

than its goal.

Overall goals are not quotas, and the Department does not sanction

recipients because their participation levels fall short of their

overall goals. Of course, if a recipient does not have a DBE program,

does not set a DBE goal, does not implement its DBE program in good

faith, or discriminates in the way it operates its program, it can be

found in noncompliance. But its noncompliance would never be having

failed to ``make a number.''

3. Economic Disadvantage

SNPRM Comments: Some commenters favored eliminating the presumption

of economic disadvantage, saying that applicants should have to prove

their economic disadvantage. Other commenters favored obtaining

additional financial information from applicants so that, even if the

presumption remained in force, recipients would have a better idea of

whether applicants really were disadvantaged. The question of the

standard for determining disadvantage generated substantial comment,

with some commenters favoring, and others objecting to, the proposed

use of a personal net worth standard to assist recipients in

determining whether an applicant was economically disadvantaged. There

was also disagreement among commenters concerning the level at which

such a standard should be set (e.g., $750,000, or something higher or

lower). These comments, and the Department's response to them, are

further discussed in the section-by-section analysis for Sec. 26.67.

Congressional Debate: The Congress debated the topic of who is

regarded as economically disadvantaged under the statute. DBE

opponents, including Senators Ashcroft (S1405) and McConnell (S1418)

and Representative Cox (H2004), asserted that outrageously rich people

could be eligible to participate as DBEs, frequently using the Sultan

of Brunei as an example. The basic thrust of their argument was that if

the program does not exclude wealthy members of the designated groups--

meaning those who are not, in fact, disadvantaged--then it is

``overinclusive'' and therefore not narrowly tailored. Senator

McConnell added that, because the Department's SNPRM did not include a

specific dollar amount for a cap on personal net worth, it would not be

effective. (S1486). On the other hand, DBE program supporters cited the

SNPRM's proposed net worth cap as an effective device to stop wealthy

people from participating in the program. These included Minority

Leader Daschle (with a reference to a letter from the Associate

Attorney General, S1413), Senator Baucus (S1414, S1423), Senator

Lieberman (S1493), Senator Boxer (S1433), and Senator Moseley-Braun,

who responded to the Sultan of Brunei example by noting that the

program was directed primarily at U.S. citizens (S1420).

DOT Response: The final rule (Sec. 26.67) specifically imposes a

personal net worth cap of $750,000. This means that, regardless of

race, gender or the size of their business, any individual whose

personal net worth exceeds $750,000 is not considered economically

disadvantaged and is not eligible for the DBE program. The provision

also makes it much easier for recipients to determine whether an

individual's net worth exceeds the cap. Applicants will have to submit

a statement of personal net worth and supporting documentation to the

recipient with their applications. If the information shows net worth

above the cap, the recipient would rebut the presumption based on the

information in the application itself and the individual would not be

eligible for the program. In such a case, it would not be necessary for

a third party to challenge the economic disadvantage of an applicant in

order to rebut the presumption. While there have been very few

documented cases of wealthy individuals seeking to take advantage of

the Department's program, the revised provisions of part 26 virtually

eliminate even the possibility of this type of abuse.

4. Social Disadvantage

SNPRM Comments: A few commenters suggested that the

[[Page 5099]]

presumption of social disadvantage, as well as that of economic

disadvantage, be eliminated, so that applicants would have to

demonstrate both elements of disadvantage. Any presumption of

disadvantage tied to a racial classification, in the view of some of

these commenters, undermined the constitutionality of the program.

Other commenters noted that persons who are not members of the

presumptively disadvantaged groups can be eligible and, in some cases,

suggested that the criteria for evaluating such applications be

clarified.

Congressional Debate: The presumption of social disadvantage drew

fire from DBE program opponents because it was allegedly overinclusive.

For example, Senator McConnell produced a map illustrating the over 100

countries of origin leading to inclusion in one of the presumed

socially disadvantaged groups, pointing out that people from some

countries (e.g., Pakistan) are presumed to be socially disadvantaged

while those from other countries (e.g., Poland) are not. (S1418).

Senator McConnell said that there was no basis for selecting this

definition over any other. (Id.) Senator Hatch also listed the

countries from which Asian-Pacific Americans and Subcontinent Asian-

Americans can originate, suggesting that it was inappropriate to create

``all kinds of special interest groups who are vying for these

programs.'' (S1411).

DBE proponents responded that discrimination against minorities and

women in general, and against specific minorities in particular (e.g.,

African Americans) was very real and formed a basis for the presumption

of social disadvantage (see discussion below concerning the existence

of discrimination). Senator Baucus also noted that this presumption

could be overcome. (S1402).

Opponents also charged that the presumption of social disadvantage

was underinclusive; that is, ``you underinclude people who have a right

to be included in the bid process.'' (Senator McConnell, S1399). The

people who are not included who have a right to be, in the view of

opponents, are white males (e.g., Senator Sessions' reference to

testimony from Adarand Constructors' owner, S1400). Senator Kennedy

disagreed with this assertion, saying

Of course, this program doesn't just help women and minorities.

It extends a helping hand to firms owned by white males, as well.

They can be certified to [participate] if they prove that they have

been disadvantaged. Just ask Randy Pech--owner of the Adarand

Construction Firm--because he is currently seeking certification.

(S1482).

Senator Domenici was interested in the same question, and entered into

the record the following response from Secretary Slater and Attorney

General Reno:

Any individual owning a business may demonstrate that he is

socially and economically disadvantaged, even if that individual is

not a woman or a minority. Both the current and proposed regulations

provide detailed guidance to recipients to assist them in making

individual determinations of disadvantaged status. And, in fact,

businesses owned by white males have qualified for DBE status.

(S1427).

DOT Response: By having passed the DBE statutory provision, after

lengthy and specific debate, Congress has once again determined that

members of the designated groups should be presumed socially

disadvantaged. All of these groups are specifically incorporated by

reference in the legislation that Congress debated and approved. This

presumption (i.e., a determination that it is not necessary for group

members to prove individually that they have been the subject of

discrimination or disadvantage) is based on the understanding of

Members of Congress about the discrimination that members of these

groups have faced. The presumption is rebuttable in the DOT program. If

a recipient or third party determines that there is a reasonable basis

for concluding that an individual from one of the designated groups is

not socially disadvantaged, it can pursue a proceeding under Sec. 26.87

to remove the presumption. Likewise, a white male, or anyone else who

is not presumed to be disadvantaged, can make an individual showing of

social and economic disadvantage and participate in the program on the

same basis as any other disadvantaged individual (see Sec. 26.67).

5. The ``Low-Bid System''

SNPRM Comments: Non-DBE contractors expressed concern that a

variety of provisions under the program and the SNPRM adversely

affected the low-bid system, including contract goals, evaluation

credits, and good faith efforts guidance concerning prime contractors'

handling of subcontractor prices and consideration of other bidders'

success in meeting goals.

Congressional Debate: Opponents of the DBE program assert that the

program results in white male contractors not receiving contracts they

would otherwise expect to receive. Senator Sessions cited the statement

of the Adarand company to this effect. (S1400). Senator Ashcroft said

that ``if two bids come in from two subcontractors, one owned by a

white male and the other by a racial minority, and the bids are the

same, or even close, the job will go to the minority-owned company, not

the low bidder.'' (S1405). Senator Gorton inserted into the record

letters from a Spokane subcontractor asserting that, in a number of

cases, it had lost subcontracts to DBE firms despite having a lower

quote. (S1415-16). Representative Roukema also cited examples of firms

who made similar assertions. (H2000).

In contrast, DBE program proponents argued that the program was

about leveling the playing field for DBEs. Senator Moseley-Braun cited

letters from her constituents for the point that

* * * the DBE program is not about taking away contracts from

qualified male-owned businesses and handing them over to unqualified

female-owned firms. The program is not about denying contracts to

Caucasian low bidders in favor of higher bids that happen to have

been submitted by Hispanics or African Americans or Asians or women.

(S1420).

Without such a program, her constituents' letters said, they would lose

the chance to compete. (Id.). Citing testimony from a Judiciary

Committee hearing, Senator Kennedy noted that it was the experience of

some DBEs that white male prime contractors had accepted higher bids

from other firms to avoid working with DBEs. (S1430).

Why would a general contractor accept a higher bid? It doesn't

make sense unless you remember that the traditional business network

doesn't include women or minorities * * * [A woman business owner

testified] that some general contractors would rather lose money

than deal with female contractors. (Id.)

DOT Response: For the most part, statutory low-bid requirements

exist only at the prime contracting level. That is, state and local

governments, in awarding prime contracts, must select the low bidder in

many procurements (there may be exceptions in some types of purchases).

Nothing in this regulation requires, under any circumstances, a

recipient to accept a higher bid for a prime contract from a DBE when a

non-DBE has presented a lower bid. This rule does not interfere with

recipients' implementation of state and local low-bid legislation.

The selection of subcontractors by a prime contractor is typically

not subject to any low-bid requirements under state or local law. Prime

contractors have unfettered discretion to select any subcontractor they

wish. Price is clearly a key factor, but nothing legally compels a

prime contractor to hire the subcontractor who makes the lowest quote.

Other factors, such as the prime

[[Page 5100]]

contractor's familiarity and experience with a subcontractor, the

quality of a subcontractor's work, the word-of-mouth reputation of the

subcontractor in the prime contracting community, or the prime's

comfort or discomfort with dealing with a particular subcontractor can

be as or more important than price in some situations. It is in this

context that Sec. 26.53 requires that prime contractors make good faith

efforts to achieve DBE contract goals. The rule does not require that

recipients ignore price or quality, let alone obtain a certain amount

of DBE participation without regard to other considerations. The good

faith efforts requirements are intended to ensure that prime

contractors cannot simply refuse to consider qualified, competitive DBE

subcontractors. At the same time, the good faith efforts waiver of

contract goals serves as a safeguard to ensure that prime contractors

will not be forced into accepting an unreasonable or excessive quote

from a DBE subcontractor.

6. Constitutionality

SNPRM Comments: Non-DBE contractors and their groups argued that

the SNPRM proposals, particularly with respect to overall goals and the

use of race-conscious measures, failed to meet the Adarand narrow

tailoring test. Many of these commenters said that the overall goals

were suspect because they did not adequately consider the capacity of

DBEs to perform contracts and Adarand requires that race-conscious

measures may be used only after a recipient has demonstrated that race-

neutral means have failed. The use of presumptions based on racial

classifications was viewed as intrinsically unconstitutional by these

commenters, many of whom cited the language of Judge Kane's decision in

the Adarand remand to this effect. Some commenters also contended that,

absent recipient-specific findings of compelling need, the program

could not be constitutional. They said that existing information

alleging compelling interest--such as various disparity studies or

information compiled by the Department of Justice--was inadequate to

meet the compelling interest test. DBEs and recipients who commented

defended the constitutionality of the program, often citing experience

with discrimination in the marketplace and contending that the SNPRM

succeeded in narrowly tailoring the program.

Congressional Debate: Proponents and opponents of the DBE program

extensively debated the constitutionality of the DBE statutory

provision and the entire DBE program. Generally, opponents argued that

the Supreme Court and District Court decisions in Adarand rendered the

program unconstitutional, while proponents said that the decisions did

not have that effect.

Proponents and opponents of the DBE program agreed that the Supreme

Court's Adarand decision established a two-part test for the

constitutionality of a program that uses a racial classification. The

program must be based on a compelling governmental interest and be

narrowly tailored to further that interest (e.g., Senator McConnell,

S1396; Senator Baucus, S1403). Opponents relied on the finding of a

Colorado district court on remand that the program was not narrowly

tailored and was thus unconstitutional (Senator McConnell, S 1396;

Senator Ashcroft, S1405). Proponents replied that the remand decision

represented the views of only one district court (Senator Baucus,

S1403), that it failed to properly apply the reasoning of the Supreme

Court decision with respect to narrow tailoring (Senator Domenici,

S1425), and that the Department's forthcoming regulations would ensure

that the program was narrowly tailored (see discussion below).

A. Compelling Interest

(1) Existence of Discrimination. Proponents (and some opponents) of

the DBE provision said that discrimination and/or disadvantage with

respect to minorities and/or women persists. In the House, these

included Representative Roukema (H2000-01), Representative Norton

(H2003), Representative Poshard (H2003), Representative Menendez

(H2004), Representative Davis of Illinois (H2005), Representative

Boswell (H2005), Representative Lampson (H2006), Representative Kennedy

(H2006), Representative Jackson-Lee (H2006), Representative Edwards

(H2007), Representative Andrews (H2007), Representative Rodriguez

(H2008), Representative Towns (H2010), Representative Dixon (H2010),

and Representative Millender-McDonald (H2011). DBE opponents typically

remained silent on this point, neither affirming nor denying the

existence of discrimination against women and minorities.

There was a similar pattern in the Senate debates. Opponents

typically did not address the present existence of discrimination or

disadvantage with respect to minorities and women or its continuing

effects, spoke of such discrimination as something that existed in the

past (Senator Sessions, S1399; Senator Hatch, S1411), or asserted that

race-based disadvantage or discrimination no longer exists (Senator

Ashcroft, S1406).

The Senators who said that such discrimination persists included

Senator Baucus (S1403, S1413, S1496), Senator Warner (S1403), Senator

Kerry (S1408), Senator Wellstone (S1410), Senator Moseley-Braun (S1419-

20), Senator Robb (S1422); Senator Brownback (S1423-24), Senator

Domenici (S1425-26), Senator Kennedy (S1429-30, S1482), Senator Specter

(S1485), Senator McCain (S1489), Senator Lautenberg (S1490), Senator

Durbin (S1491), Senator Daschle (S1492), Senator Lieberman (S1493),

Senator Bingaman (S1494), Senator Murray (S1495), and Senator Dorgan

(S1495).

(2) Evidence of discrimination or disadvantage. In comments on the

passage of the TEA-21 conference report in the Senate, Senator Chafee

noted a Colorado Department of Transportation disparity study that

found a disproportionately small number of women- and minority-owned

contractors participating in that state's highway construction

industry. More than 99 percent of contracts went to firms owned by

white men. (Congressional Record, May 22, 1998; S5413). In the House

discussion of the conference report, Representative Norton presented an

extensive summary of relevant evidence of discrimination forming the

basis for a compelling need for the DBE program. (H3957).

Throughout the debate, the Members who affirmed the existence of

discrimination and/or disadvantage asserted a number of factual bases

for concluding that the DBE program was necessary. This information is

largely drawn from the Senate debate; the briefer House debate contains

less detail.

Senator Baucus cited disparities between the earnings of women and

men and between the percentage of small businesses women own and the

percentage of Federal procurement dollars they receive. He also noted

that minorities make up 20 percent of the population, own 9 percent of

construction businesses, and get only 4 percent of construction

receipts. (S1403). Finally, Senator Baucus, via a letter from the

Associate Attorney General, cited to numerous Congressional findings

concerning the effects of discrimination in the construction industry

and in DOT-assisted programs. (S1413).

Senator Kerry added that women own 9.2 percent of the nation's

construction firms but their companies earn only about half of what is

earned by male-owned firms. (S1409). Senator Robb

[[Page 5101]]

commented that the evidence of racially based disadvantage is

``compelling and disturbing.'' He continued, stating that, ``White-

owned construction firms receive 50 times as many loan dollars as

African-American owned firms that have identical equity.'' (S1422).

Senator Kennedy said that the playing field for women and minorities

and other victims of discrimination was still not level. Job

discrimination against minorities and the ``glass ceiling'' for women

still persisted, he said, adding that ``Nowhere is the deck stacked

more heavily against women and minorities than in the construction

industry.'' (S1429). He cited a number of instances in which minority

or female contractors encountered overt discrimination in trying to get

work. (S1429-30).

Senator Lautenberg said that, for transportation-related contracts,

minority-owned firms get only 61 cents for every dollar of work that

white male-owned businesses receive. The comparable figure for women-

owned firms was 48 cents. He also mentioned that ``women-owned

businesses have a lower rate of loan delinquency, yet still have far

greater difficulty in obtaining loans.'' (S1490). He then spoke of the

continuing effects of past discrimination:

Jim Crow laws were wiped off the books over 30 years ago.

However, their pernicious effects on the construction industry

remain. Transportation construction has historically relied on the

old boy network which, until the last decade, was almost exclusively

a white, old boy network. * * * This is an industry that relies

heavily on business friendships and relationships established

decades, sometimes generations, ago--years before minority-owned

firms were even allowed to compete. (Id.)

Senator Durbin referred to recent studies concerning job bias

against minorities and women. (S1491). Senator Lieberman referred

generally to previous Congressional committee findings and testimony

concerning still-existing barriers to full participation for minorities

and women. (S1493). He also cited the May 1996 Department of Justice

survey of discrimination and its effects in business and contracting.

He referred to a recent study in Denver showing that African Americans

were 3 times, and Hispanics 1.5 times, more likely than whites to be

rejected for business loans. Senator Daschle summed up by saying,

``[t]here is clearly a compelling interest in addressing the pervasive

discrimination that has characterized the highway construction

industry.'' (S1492).

Throughout the portion of the debate described above, many of the

Members stressed that goal-based programs like the DBE program were the

only effective way to combat the continuing effects of discrimination.

Senator Baucus cited the experience of Michigan, in which DBE

participation in the state-funded portion of the highway program fell

to zero in a nine-month period after the state terminated its DBE

program, while the Federal DBE program in Michigan was able to maintain

12.7 percent participation. (S1404). Senator Kerry also raised the

Michigan example, and went on to cite similar sharp decreases in DBE

participation when Louisiana, Hillsborough County, Florida, and San

Jose, California, eliminated affirmative action programs covering

state- and locally-funded programs. Senator Kerry asked rhetorically:

* * * is that just the economy of our country speaking, an

economy at one moment that is capable of having 12 percent and at

another moment, where they lose the incentive to do so, to drop down

to zero, to drop down by 99 percent, to drop down by 80 percent, to

have .4 at the State level while at the Federal level there are 12

percent? You could not have a more compelling interest if you tried.

* * * (S1409-10).

Senator Moseley-Braun added the examples of Arizona, Arkansas,

Rhode Island, and Delaware to the jurisdictions cited by other members

where state-funded projects without a DBE program have significantly

less DBE participation than Federally funded projects subject to the

DBE program. She added, ``Where there are no DBE programs, women- and

minority-owned small businesses are shut out of highway construction.''

(S1420-21). Senator Kennedy added Nebraska, Missouri, Tampa and

Philadelphia to the list of jurisdictions that experienced precipitous

drops in DBE participation after goals programs ended. (S1429-30;

S1482). He also cited comments from DBE companies that goal programs

were needed to surmount discrimination-related barriers. (S1482).

Senator Domenici repeated many of the same points as previous DBE

proponents concerning the basis for concluding that the program was

needed (S1426), as did Senator Kempthorne. (S1494).

Senator Robb emphasized that the DBE program was essential to

combating discrimination and ensuring economic opportunity, explicitly

linking the fall-off in DBE participation to continuing discrimination:

Where DBE programs at the State level have been eliminated,

participation by qualified women and qualified minorities in

government transportation contracts has plummeted. There is no way

to know whether this discrimination is intentional or subconscious,

but the effect is the same. This experience demonstrates the sad but

inescapable truth that, when it comes to providing economic

opportunities to women and minorities, passivity equals inequality.

(S1422).

3. Narrow tailoring.--DBE proponents cited the Department's

proposed DBE rule as the vehicle that would ensure that the DBE program

would be narrowly tailored. They cited features of the SNPRM including

a new mechanism for calculation of overall goals, giving priority to

race-neutral measures in meeting goals, a greater emphasis on good

faith efforts, DBE diversification, added flexibility for recipients,

net worth provisions, ability to challenge presumptions of social and

economic disadvantage, and flexibility in goal-setting. In comments on

the Senate consideration of the TEA-21 conference report, Senator

Baucus concluded by saying:

As I explained in my statements during the debate on the

McConnell amendment * * * the program is narrowly tailored, both

under the current and the new regulations, which emphasize flexible

goals tied to the capacity of firms in the local market, the use of

race-neutral measures, and the appropriate use of waivers for good

faith efforts. (Congressional Record, May 22, 1998; S5414).

Following Senator Baucus' remarks, Senator Chafee, Chairman of the

committee of jurisdiction, requested that he be associated with Senator

Baucus' remarks on constitutionality. (S5414).

DBE opponents denied that regulatory change could result in a

narrowly tailored program. Senator Smith said ``The administration's

attempt to comply with the Court's decision by fiddling around with the

DOT regulations does not meet the constitutional litmus test.''

(S1398). The most frequent argument against the efficacy of regulatory

change was that a racial classification is inherently unable to be

narrowly tailored. (Senator Sessions, S1399-1400; Senator Ashcroft,

S1407).

DOT Response: The 1998 debate over DBE legislation was the most

thorough in which Congress has engaged since the beginning of the

program. The record of this debate clearly supports the Department's

view that there is a compelling governmental interest in remedying

discrimination and its effects in DOT-assisted contracting. Congress

clearly determined that real, pervasive, and injurious discrimination

exists. Congress backed up that determination with reference to a wide

range of factual material, including private and public contracting,

DOT-assisted and state-and locally-funded programs and the financing of

the contracting industry. By retaining the DBE statutory provisions

[[Page 5102]]

against this factual background, Congress clearly found that there was

a compelling governmental interest in having the program.

The courts, including the court in the Adarand Constructors Inc. v.

Pena, 965 F.Supp. 1556 (D. Colo., 1997) and the court in In re:

Sherbrooke Sodding, 6-96-CV-41 (D. Minn. 1998), agree that Congress has

the power to legislate on a nationwide basis to address nationwide

problems. Congress has a unique role as the national legislature to

look at the whole of the United States for the basis to find a

compelling governmental interest supporting the use of race-based

remedies. Congress is not required to make particularized findings of

discrimination in individual localities to which a nationwide program

may apply. Nor is Congress required to find that the Federal government

itself has discriminated before applying a race-conscious remedy. (Id.

at 1573).

Having reviewed the extensive evidence of discrimination and its

relationship to DOT-assisted contracting, the District Court in Adarand

determined that current and previous DBE provisions were a ``considered

response by Congress to the effects of discrimination on the ability of

minorities to participate in the mainstream of federal contracting.''

(Id. at 1576). The court stated that ``Congress has a strong basis in

evidence for enacting the challenged statutes, which thus serve a

`compelling governmental interest.' '' (Id. at 1577). The extensive

Congressional debate and information supporting the enactment of the

1998 DBE provision significantly strengthens the existing basis for

declaring that this program serves a compelling governmental interest.

The basis for District Court's view that the program at issue in

Adarand is unconstitutional is stated most clearly in the following

passage:

Contrary to the [Supreme] Court's pronouncement that strict

scrutiny is not `fatal in fact,' I find it difficult to envisage a

race-based classification that is narrowly tailored. By its very

nature, such [a] program is both underinclusive and overinclusive.

(Id. at 1580).

By underinclusive, the court said it meant that caucasians and members

of non-designated minority groups are excluded. By overinclusive, it

said it meant that all the members of the designated groups are

presumed to be economically and/or socially disadvantaged, without

Congress having inquired whether a particular entity seeking a racial

preference has suffered from the effects of past discrimination (citing

the Supreme Court's Croson decision, which concerned the powers of

state and local governments to use race-based remedies). (Id.)

As Senator Domenici pointed out (S1425), the key words in the

District Court's opinion are ``Contrary to the [Supreme] Court's

pronouncement. * * *'' The District Court's analysis departs markedly

from the controlling decision of the Supreme Court on this issue

(Adarand v. Pena, 515 U.S. 200 (1995)). The Supreme Court's language

with which the District Court disagreed is the following:

Finally, we wish to dispel the notion that strict scrutiny is

``strict in theory, but fatal in fact.'' [citation omitted] The

unhappy persistence of both the practice and the lingering effects

of racial discrimination against minority groups in this country is

an unfortunate reality, and government is not disqualified from

acting in response to it * * * When race-based action is necessary

to further a compelling interest, such action is within

constitutional constraints if it satisfies the ``narrow tailoring''

test this Court has set out in previous cases. (515 U.S. at 237).

The Supreme Court evidently considers the ``not fatal in fact''

language to have continuing vitality, having cited it in a subsequent

case (U.S. v. Virginia, 518 U.S. 515, note 6 (1996)).

Under the District Court's analysis, Congress could never use a

race-based classification, no matter how compelling the need, because

any such classification would intrinsically fail to be narrowly

tailored. This approach effectively moots the determination of whether

there is a compelling governmental interest. The Supreme Court's

approach, by contrast, permits a racial classification to be used,

given the existence of a compelling interest, if it is narrowly

tailored.

What is the test for narrow tailoring? As set forth in United

States v. Paradise, 480 U.S. 149, 171 (1987), the test includes several

factors: ``the necessity for relief and the efficacy of alternative

remedies; the flexibility and duration of the relief, including the

availability of waiver provisions; the relationship of the goals to the

relevant labor market; and the impact of the relief on the rights of

third parties.'' In Adarand, the Supreme Court specifically invited

inquiry into whether there was any consideration of the use of race-

neutral means to increase minority business participation (related to

the efficacy of alternative remedies) and whether the program was

appropriately limited so that it will not last longer than the

discrimination it is designed to eliminate (related to the duration of

relief). (515 U.S. at 238).

This final rule successfully addresses each element of this test:

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 Sec. 26.51 of this rule,

recipients are required to meet the maximum feasible portion of their

overall goals by using race-neutral measures. Recipients are not

required to have contract goals on each contract. Instead, they are

instructed to use contract goals only for any portion of their overall

goal they cannot meet through race-neutral measures. Contract goals are

intended as a safety net to be used when race-neutral means are not

effective to ensure that a recipient can achieve ``level playing

field.'' Moreover, the regulations provide that recipients must reduce

the use of contract goals when other means are sufficient to meet their

overall goals. This ensures that race-conscious relief is used only to

the extent necessary and is replaced by race-neutral as quickly as

possible.

Flexibility of relief. Flexibility is built into the

program in a variety of ways. Recipients set their own goals, based on

local market conditions; their goals are not imposed by the federal

government nor do recipients have to tie them to any uniform national

percentage. (Sec. 26.45). Recipients also choose their own method for

goal setting and can choose to base the goal on the evidence that they

believe best reflects their market conditions. (Sec. 26.45). Recipients

have broad discretion to choose whether or not to use a goal on any

given contract, and if they do choose to use a contract goal, they are

free to set it at any level they believe is appropriate for the type

and location of the specific work involved. (Sec. 26.51). The rule also

ensures flexibility for contractors by requiring that any contract goal

be waived entirely for a prime contractor that demonstrates that it

made good faith efforts but was still unable to meet the goal.

(Sec. 26.53). The rule also allows recipients that believe they can

achieve equal opportunity for DBEs through different approaches to get

waivers releasing

[[Page 5103]]

them from almost any of the specific requirements of the rule.

(Sec. 26.103). Recipients can also get exemptions from the rule if they

have unique circumstances that make complying with the rule

impractical. (Sec. 26.103).

Duration of relief. The TEA-21 DBE program will end in

2004 unless reauthorized by the Congress. In each successive

reauthorization bill for the surface transportation and airport

programs, Congress will have the opportunity to examine the current

state of transportation contracting and determine whether the DBE

program statutes are still necessary to remedy the continuing effects

of discrimination. In addition, the duration of relief for individuals

and firms are limited by the personal net worth threshold and business

size caps. When an individual's personal wealth grows beyond the

threshold, he or she will lose the presumption of disadvantage.

(Sec. 26.67). Similarly, when a firm's receipts grows beyond the small

business size standards, it loses its eligibility to participate in the

program. (Sec. 26.65). Finally, to ensure that race-conscious remedies

are not used any longer than absolutely necessary, Sec. 26.51 requires

recipients to reduce the use of contract goals and rely on race-neutral

measures to the extent that they are effective.

Relationship of goals to the relevant market. The overall

goal setting provisions of Sec. 26.45 require that recipient set

overall goals based on demonstrable evidence of the relative

availability of ready, willing and able DBEs in the areas from which

each recipient obtains contractors. These provisions ensure that there

is as close a fit as possible between the goals set by each recipient

and the realities of its relevant market. When a recipient sets

contract goals, Sec. 26.51 provides that these goals are to be set

realistically in relation to the availability of DBEs for the type and

location of work involved.

Impact of relief on the rights of third parties. The

legitimate interests of third parties (e.g., prime contractors, non-DBE

subcontractors) are only minimally impacted by the DBE program, since

the program is aimed at replicating a market in which there are no

effects of discrimination and the program affects only a relatively

small percentage of total federal-aid funds. The design of the overall

and contract goal provisions ensures that the use of race-conscious

remedies having the potential to affect the interests of third parties

is limited to the extent necessary to counter the effects of

discrimination. Individual prime contractors are further protected from

suffering any undue burdens by Sec. 26.51, which prevents a prime

contractor from losing a contract if it made good faith efforts but was

still unable to meet a goal. Non-DBE firms are also protected by

Sec. 26.33, which directs recipients to take appropriate steps to

address areas of overconcentration of DBE firms in certain types of

work that could unduly burden non-DBE firms seeking the same type of

work.

Inclusion of appropriate beneficiaries. The certification

provisions of Subparts D and E, and particularly the social and

economic disadvantage provisions of Sec. 26.67, ensure that only firms

owned and controlled by individuals who are in fact socially and

economically disadvantaged can participate in the program. Eligibility

provisions guard against overinclusiveness by ensuring that individuals

with too great net worth are not presumed disadvantaged and by

permitting the recipient--on its own initiative or as the result of a

complaint--to follow procedures to rebut the presumption of social and/

or economic disadvantage. They guard against underinclusiveness by

permitting any business owner, including a white male, to demonstrate

social and economic disadvantage on an individual basis.

Section-by-Section Analysis

Section 26.1 What Are the Objectives of This Part?

There were relatively few comments on this section of the SNPRM,

most of which agreed with the proposed language. We have adopted the

suggestion of some commenters that specific reference be made to the

role of the DBE program in helping DBEs overcome barriers (e.g., access

to capital and bonding) to equal participation. We have also added a

specific reference to the role of the program in creating a level

playing field on which DBEs can compete fairly for DOT-assisted

contracts. Some non-DBE contractors urged that language be added to

explicitly oppose ``reverse discrimination.'' The rule clearly states

that nondiscrimination is the program's first objective and the

Department reiterates here that it opposes unlawful discrimination of

any kind.

Section 26.3 To Whom Does This Part Apply?

This provision is unchanged from the SNPRM, except for references

to the new TEA-21 statutory provisions. A few commenters wanted this

provision to apply to Federal Railroad Administration (FRA) programs,

as did the original version of former part 23. However, FRA does not

have specific statutory authority for a DBE program parallel to the

TEA-21 language. One commenter asked if the language saying that DBE

requirements do not apply to contracts without any DOT funding is

inconsistent with Federal Transit Administration (FTA) guidance on

applicability. While the structure of the FTA program is such that FTA

funds are commingled with local funds in many transit authority

contracts (e.g., any contract involving FTA operating assistance

funds), to which DBE requirements would apply, a contract which is

funded entirely with local funds--and without any Federal funds--would

not be subject to requirements under this rule.

Section 26.5 What Do The Terms Used in This Part Mean?

There were relatively few comments on the definitions proposed in

the SNPRM. One commenter wanted to substitute the term ``historically

underutilized business'' for DBE. Given the continued use of the DBE

term in Congressional consideration of the program, the continued use

of the ``socially and economically disadvantaged individuals'' language

in the statute, and the familiarity of concerned parties with the DBE

term, we do not believe changing the term would be a good idea.

A few commenters asked for additional definitions or elaboration of

existing definitions (e.g., ``form of arrangement,'' ``financial

assistance program,'' ``commercially useful function''). These terms

are either already defined sufficiently or are best understood in

context of the operational sections in which they are embedded, and

abstract definitions in this section would not add much to anyone's

ability to make the program work well. Consequently, we are not adding

them. Otherwise the final rule adopts the SNPRM proposals for

definitions with only minor editorial changes.

The Department has added, for the sake of clarity and consistency

with other Federal programs, definitions of the terms Alaskan native,

Alaskan native corporation (ANC), Indian tribe, immediate family

member, Native Hawaiian, Native Hawaiian organization, principal place

of business, primary industry classification, and tribally-owned

concern. These definitions are taken from the SBA's new small

disadvantaged business program regulation (13 CFR Sec. 124.3). The

definitions of the designated groups included in the definition of

``socially

[[Page 5104]]

and economically disadvantaged individual'' also derive from the SBA

regulations, as the Department's DBE statutes require. We believe these

will be useful terms of art in implementing the DBE program.

A few commenters requested definitions for the terms ``race-

conscious'' and ``race-neutral,'' and we have provided definitions. A

race-conscious program is one that focuses on, and provides benefits

only for, DBEs. The use of contract goals is the primary example of a

race-conscious measure in the DBE program. A race-neutral program is

one that, while benefiting DBEs, is not solely focused on DBE firms.

For example, small business outreach programs, technical assistance

programs, and prompt payment clauses can assist a wide variety of small

businesses, not just DBEs.

Section 26.7 What Discriminatory Actions Are Forbidden?

One commenter wanted to add prohibitions of discrimination based on

age, disability and religion. The Department is not doing so, because

discrimination on these grounds is already prohibited by other statutes

(e.g., the Americans with Disabilities Act with respect to disability).

Also, statutes which form the basis for this rule focus on race, color,

national origin, and sex. Congress determined that remedial action

focused on these areas is necessary. These grounds for discrimination

are also most relevant to problems in the DBE program that have been

alleged to exist (e.g., disparate treatment of DBE certification

applicants by race or sex). Some opponents of the program said that the

DBE program discriminates against non-DBEs. However, the Department

believes that the program is constitutional and does not violate equal

protection requirements. A reference to DOT Title VI regulations has

been deleted as unnecessary; otherwise, this provision is the same as

in the SNPRM.

Section 26.9 How Does the Department Issue Guidance and

Interpretations Under This Part?

Commenters, most of whom were recipients, focused on two issues in

this section. First, a majority of the comments favored the

``coordination mechanism'' concept for ensuring consistent DOT guidance

and interpretations. The few that disagreed with this approach did so

out of a concern that the mechanism would add delays to the process.

These commenters favored additional training or an 800 number hot line

to speed up the process.

We believe that proper coordination of interpretations and guidance

is vital to the successful implementation of this rule. As the

preambles to the 1992 and 1997 proposed rules mentioned, inconsistent

implementation of part 23 has been a continuing problem, which has been

criticized by a General Accounting Office report and which has created

unnecessary difficulty for recipients, contractors, and the Department

itself. A process for ensuring that the Department speaks with one

voice on DBE implementation matters, and for letting the public know

when DOT has spoken, will greatly improve the service we give our

customers.

We do not believe this coordination process will result in

significant delays in providing guidance. Nor will it inhibit the

ability of DOT staff and customers to communicate with one another. For

example, the process does not apply to informal advice provided by

staff to recipients or contractors over the phone or in a letter or e-

mail. It does maintain, however, the important distinction between

informal staff assistance on one hand and a binding institutional

position on the other.

For clarity in the process, we have modified the language of the

rule text to make clear that interpretations and guidance are binding,

official Departmental positions if the Secretary signs them or if the

document includes a statement that they have been reviewed and approved

by the General Counsel. The General Counsel will consult fully with all

concerned offices as part of this review process.

We intend to post significant guidance documents and

interpretations on the Department's web site to make them widely and

quickly available. As some commenters suggested, we are also continuing

to consider forming an advisory committee (or working group of an

existing committee) to facilitate customer input into DBE program

matters. This is separate from the coordination mechanism, however,

which is an internal DOT process.

The rule's provisions regarding exemptions and waivers, previously

found in the SNPRM's Sec. 26.9 (c) and (d), are now included as a

separate section at Sec. 26.15.

Section 26.11 What Records do Recipients Keep and Report?

The Department asked, in the SNPRM, whether it would be advisable

to have one standard reporting form for information about the DBE

program. Currently, each operating administration (OA) has its own

reporting form and requirements. Virtually all the commenters that

addressed this issue favored a single, DOT-wide reporting form.

Commenters also had a wide variety of suggestions for what data should

be reported, formats, and retention periods.

The Department is adopting the suggestion of having a single

reporting form, which we believe will reduce administrative burdens for

recipients, particularly those who receive funds from more than one OA.

Because we do not want to delay the issuance of this rule while a form

is being developed, we are reserving the date on which this single form

requirement will go into effect. We will take comments on the specifics

of reporting into account and consult with interested parties as we

devise the form, which will be published subsequently in Appendix B to

this rule. The Appendix will also address the issues of reporting

frequency and record retention periods. Meanwhile, recipients will

continue to report as directed by the concerned OA(s), using existing

reporting forms.

The rule is also adding a requirement that recipients develop and

maintain a ``bidders'' list. The bidders list is intended to be a count

of all firms that are participating, or attempting to participate, on

DOT-assisted contracts. The list must include all firms that bid on

prime contracts or bid or quote subcontracts on DOT-assisted projects,

including both DBEs and non-DBEs. Bidders lists appear to be a

promising method for accurately determining the availability of DBE and

non-DBE firms and the Department believes that developing bidders data

will be useful for recipients. Creating and maintaining a bidders list

will give recipients another valuable way to measure the relative

availability of ready, willing and able DBEs when setting their overall

goals. (See Sec. 26.45). We realize that identifying subcontractors,

particularly non-DBEs and all subcontractors that were unsuccessful in

their attempts to obtain contracts, may well be a difficult task for

many recipients. Mindful of that potential burden, the rule will not

impose any procedural requirements for how the data is collected.

Recipients are free to choose whether or not they wish to gather this

data through their existing bidding and reporting processes. Recipients

are encouraged to make use of all of the data already available to them

and all methods of reporting and communication with their contracting

community that they already have in place. In addition, the Department

suggests that recipients consider using a widely publicized public

notice or a

[[Page 5105]]

widely disseminated survey to encourage all firms that have bid or

quoted contracts to make themselves known to recipients.

Once recipients have created the list of bidders, they will have to

supplement that information with the age of each firm (since

establishment) and the annual gross receipts of the firm (or an average

of its annual gross receipts). Recipients can gather this additional

information by sending a questionnaire to the firms on the list, or by

any other means that the recipient believes will yield reliable

information. The recipient's plan for how to create and maintain the

list and gather the required information must be included in its DBE

program.

Section 26.13 What Assurances Must Recipients and Contractors Make?

There were few comments on this section. Most of these supported

the proposal. One comment suggested specific mention of prompt payment,

but in view of the substantive requirements on this subject, we do not

believe such a mention is needed. Some commenters favored requiring

additional public participation as part of the assurance for

recipients. Again, given substantive provisions of this rule concerning

public participation, we do not believe that repetition here is needed.

One commenter said that incorporating the requirements of part 26 in

the contract was confusing, since many provisions of part 26 apply only

to recipients. We have rewritten the assurance for contractors in

response to this concern, specifying that contractors are responsible

only for carrying out the requirements of part 26 that apply to them.

Section 26.15 How Can Recipients Apply for Exemptions or Waivers?

There has been some confusion as to this rule's distinction between

exemption and waiver. Put simply, exemptions are for unique situations

that are most likely not to be either generally applicable to all

recipients or to have been contemplated in the rulemaking process. If

such a situation occurs and it makes it impractical for a particular

recipient to comply with a provision of part 26, the recipient should

apply for an exemption from that provision. The waiver provision, by

contrast, is not designed for extraordinary circumstances where a

recipient may not be able to comply with part 26. Waiver is for a

situation where a recipient believes that it can better accomplish the

objectives of the DBE program through means other than the specific

provisions of part 26.

There were a number of comments about the proposed program waiver

provision. Most commenters on this issue favored the proposal,

believing it could add flexibility to the way recipients implement the

DBE program. A few commenters were concerned that too liberal use of

the waiver provision might undermine the goals of the rule.

The Department believes that the waiver provision is an important

aspect of the DBE program. The provision ensures that the Department

and a recipient can work together to respond to any unique local

circumstances. Recipients are encouraged to carefully review the

circumstances in their own jurisdictions to determine what mechanisms

are best suited to achieving compliance with the overall objectives of

the DBE program. If a recipient believes it is appropriate to operate

its program differently from the way that a provision of Subpart B or C

provides, including, but not limited to, any provisions regarding

administrative requirements, overall or contract goals, good faith

efforts or counting provisions, it can apply for a waiver. For example,

waiver requests could pertain to such subjects as the use of a race-

conscious measure other than a contract goal, different ways of

counting DBE participation in certain industries, use of separate

overall or contract goals to address demonstrated discrimination

against specific categories of socially and economically disadvantaged

individuals, the use or wording of assurances, differences in

information collection requirements and methods, etc.

The Department will, of course, carefully review any applications

for waivers to make sure that innovative state or local programs are

able to meet the objectives of the statutes and regulation. Decisions

on waiver requests are made by the Secretary. This authority has not

been delegated to other officials. The waiver provision, which the

Department believes will help assist recipients to ``narrowly tailor''

the program to state and local circumstances and ensure

nondiscrimination, remains in the final rule.

Section 26.21 Who Must Have a DBE Program?

The only substantive comment concerning this provision asked that

Federal Railroad Administration (FRA) programs be included. The

Department is not including FRA programs under this rule because FRA

does not have a specific DBE program statute parallel to those covering

the Federal Aviation Administration (FAA), FTA, and FHWA. FRA could

consider issuing a rule similar to part 26 under its own, separate

statutory authority. The Department shortened paragraph (b)(1) to make

it easier to understand. Within 180 days of the effective date of this

rule, all recipients with existing programs must submit revised

programs to the relevant OA for approval. The only changes from

existing programs that recipients would have to make are changes needed

to accommodate differences between former part 23 and part 26. Future

new recipients would, of course, submit a DBE program as part of the

approval process for financial assistance.

Section 26.23 What is the Requirement for a Policy Statement?

Section 26.25 What is the Requirement for a Liaison Officer?

Section 26.27 What Efforts Must Recipients Make Concerning DBE

Financial Institutions?

There were no substantive comments concerning Secs. 26.23-26.27,

and the Department is adopting them as proposed.

Section 26.29 What Prompt Payment Mechanisms Must Recipients Have?

There was substantial comment on the issue of prompt payment. A

majority of commenters supported the concept of prompt payment

provisions. Some recipients pointed out that they already had prompt

payment provisions on the books. DBEs generally supported mandating

prompt payment provisions though they, as well as other commenters,

recognized that slow payment is a problem affecting many

subcontractors, not just DBEs. Some of these comments suggested making

prompt payment requirements applicable to subcontracts in general, not

just DBE subcontracts. Some recipients were concerned about getting in

the middle of disputes between prime contractors and subcontractors.

Some commenters wanted the Department to mandate prompt payment

provisions, while others preferred that their use by recipients remain

optional.

Having considered the variety of views expressed on this subject,

the Department believes that prompt payment provisions are an important

race-neutral mechanism that can benefit DBEs and all other small

businesses. Under part 26, all recipients must include a provision in

their contracts requiring prime contractors to make prompt payments to

their subcontractors, DBE and non-DBE alike. It is clear that DBE

subcontractors are significantly--and, to the extent that

[[Page 5106]]

they tend to be smaller than non-DBEs, disproportionately--affected by

late payments from prime contractors. Lack of prompt payment

constitutes a very real barrier to the ability of DBEs to compete in

the marketplace. It is appropriate for the Department to require

recipients to take reasonable steps to deal with this barrier. We

recognize that delayed payments do not affect only DBE contractors; a

prompt payment requirement applying to all subcontracts is an excellent

example of a race-neutral measure that will assist DBEs, and we are

therefore requiring that recipients' prompt payment mechanisms apply to

all subcontracts on Federally-assisted contracts.

Paragraph (a) of this section requires recipients to put into their

DBE programs a requirement for a prompt payment contract clause. This

clause would appear in every prime contract on which there are

subcontracting possibilities, and it would obligate the prime

contractor to pay subcontractors within a given number of days from the

receipt of each payment the recipient makes to the prime contractor.

Payment is required only for satisfactory completion of the

subcontractor's work. The clause would also apply to the return of

retainage from the prime to the subcontractor. Retainage would have to

be returned within a given number of days from the time the

subcontractor's work had been satisfactorily completed, even if the

prime contract had not yet been completed. A majority of commenters on

the retainage issue favored a requirement of this kind.

The number of days involved would be selected by the recipient,

subject to OA approval as part of the recipient's DBE program. In

approving these time frames, the OAs will consider whether they are

realistic and sufficiently brief to ensure genuinely prompt payment.

Recipients who already operate under prompt payment statutes may use

their existing authority in implementing this requirement. It may be

necessary to add to existing contract clauses in some cases (e.g., if

existing prompt payment requirements do not cover retainage).

Paragraph (b) lists a series of additional measures that the

regulation authorizes, but does not require, recipients to use. These

include alternative dispute resolution, holding of payments to primes

until subcontractors are paid, and other mechanisms that the recipient

may devise. All these mechanisms could be made part of the recipient's

DBE programs.

Section 26.31 What Requirements Pertain to the DBE Directory?

Recipients maintain directories listing certified DBEs. The issue

most discussed by commenters on this section was whether the directory

should include material concerning the qualifications of the firm to do

various sorts of work. For example, has the firm been pre-qualified by

the recipient? Can it do creditable work? What kinds of work does the

firm prefer to do? Some commenters also asked that the directory should

list the geographical areas in which the firm is willing to work. Other

commenters opposed the idea of including this kind of information in

the directory.

The Department believes that the directory and the certification

process are closely intertwined. The primary purpose of the directory

is to show the results of the certification process. Consequently, the

directory should list all firms that the recipient has certified, along

with basic identifying information for the firm. Since certification

under this rule pertains to the various kinds of work a firm's

disadvantaged owners can control, it is important to list those kinds

of work in the directory. For example, if a firm seeks to work in

fields A, B, and C, but the recipient has determined that its

disadvantaged owners can control its operations only with respect to A

and B, then the directory would recite that the firm is certified to

perform work as a DBE in fields A and B.

The focus of the directory is intended to be eligibility. A

directory is a list of firms that have been certified as eligible DBEs,

with sufficient identifying information to permit interested firms to

contact the DBEs. We do not intend to turn a recipient's directory into

a comprehensive business resource manual. For example, information

about firms' qualifications, geographical preferences for work,

performance track record, capitalization, etc. are not required to be

part of the directory. Some commenters favored including one or more of

these elements, but we are concerned that other business information--

however useful in its own right--could clutter up the directory and

dilute its focus on certification.

Section 26.33 What Steps Must a Recipient Take to Address

Overconcentration of DBEs in Certain Types of Work?

For some time, the Department has heard allegations that DBEs are

overconcentrated in certain fields of highway construction work (e.g.,

guardrail, fencing, landscaping, traffic control, striping). The

concern expressed is that there are so many DBEs in these areas that

non-DBEs are frozen out of the opportunity to work. In an attempt to

respond to these concerns, the SNPRM asked for comment on a series of

options for ``diversification'' mechanisms, various incentives and

disincentives designed to shift DBE participation to other types of

work.

The Department received a great deal of comment on these proposals,

almost all of it negative. There were few comments suggesting that

overconcentration was a serious problem, and many comments said that

the alleged problem was not real. Some FTA and FAA recipients said that

if there was a problem with overconcentration, it was limited to the

highway construction program. As a general matter, recipients said that

the proposed mechanisms were costly, cumbersome, and too prescriptive.

Prime contractors opposed the provisions because they would make it

more difficult for them to find DBEs with which to meet their goals,

while DBEs opposed them because they felt the provisions would penalize

success and force them out of areas of business in which they were

experienced. Many commenters suggested using outreach or business

development plans as ways of assisting DBEs to move into additional

areas of work.

The Department does not have data from commenters or other sources

to support a finding that ``overconcentration'' is a serious,

nationwide problem. However, as part of the narrow tailoring of the DBE

program, we believe it would be useful to give recipients the authority

to address overconcentration problems where they may occur. In keeping

with the increased flexibility that this rule provides recipients, we

give recipients discretion to identify situations where

overconcentration is unduly burdening non-DBE firms. If a recipient

finds an area of overconcentration, it would have to devise means of

addressing the problem that work in their local situations. Possible

means of dealing with the problem could include assisting prime

contractors to find DBEs in non-traditional fields or varying the use

of contract goals to lessen any burden on particular types of non-DBE

specialty contractors. While recipients would have to obtain DOT

approval of determinations of overconcentration and measures for

dealing with them, the Department is not prescribing any specific

mechanisms for doing so.

[[Page 5107]]

Section 26.35 What Role do Business Development and Mentor-Protege

Programs Have in the DBE Program?

In the SNPRM, both mentor-protege programs and business development

programs (BDPs) were cast as tools to use for diversification. They

still may be used for that purpose, as noted in Sec. 26.33. However,

the Department believes that they may have a broader application, and

their use in the final rule is not limited to diversification purposes.

BDPs, in particular, are good examples of race-neutral methods

recipients can use to promote the participation of DBEs and other small

businesses in their contracting programs.

There were few comments on these provisions. Recipients wanted

flexibility, and suggested that these kinds of programs should be

optional. Their comments said that such programs were resource-

intensive, and that Federal financial assistance for them would be

welcome. One contractors' organization offered its own mentor-protege

plan as a model. A few comments voiced suspicion of mentor-protege

plans, on the basis that they allowed fronts and frauds into the

program.

The final rule makes the use of BDPs and mentor-protege programs

optional for recipients. An operating administration can direct a

particular recipient to institute a BDP, but BDPs are not mandatory

across the board. The operating administration would negotiate with the

recipient before mandating a BDP.

One feature added to this provision allows recipients to establish

a kind of mini-graduation requirement for firms that voluntarily

participate in BDPs. One of the purposes of a BDP is to equip DBE firms

to compete in the market outside the DBE program. Therefore, a

recipient could ask BDP participants to agree--as a condition of

receiving BDP assistance--to agree to leave the DBE program after a

certain number of years, or after certain business development

objectives had been achieved.

Standing alone, mentor-protege programs are not an adequate

substitute for the DBE program. While they can be an important tool to

help selected firms, they cannot be counted on to level the playing

field for DBEs in general. An effective mentor-protege program requires

close monitoring to guard against abuse, which further limits the

number of DBEs they can assist. Even with these limits, a mentor-

protege program that has safeguards to prevent large non-DBE firms from

circumventing the DBE program can be a useful component of a

recipient's overall strategy to ensure equal opportunities for DBEs.

The final rule includes safeguards intended to prevent the misuse

of mentor-protege programs. Only firms that a recipient has already

certified as DBEs (necessarily including a determination that they are

independent firms) can participate as proteges. This is intended to

preclude non-DBE firms from creating captive DBE firms to serve as

proteges. A non-DBE mentor firm cannot get credit for more than half

its goal on any contract by using its own protege. Moreover, a non-DBE

mentor firm cannot get DBE credit for using its own protege on more

than every other contract performed by the protege. That is, if Mentor

Firm X uses Protege Firm Y to perform a subcontract, X cannot get DBE

credit for using Y on another subcontract until Y had first worked on

an intervening prime contract or subcontract with a different prime

contractor.

To make mentor-protege relationships feasible, the rule provides

that mentors and proteges are not treated as affiliates of one another

for size determination purposes. Mentor-protege programs and BDPs must

be approved by the concerned operating administration before they take

effect. Recipients who already have such programs in place would make

them part of their revised DBE programs sent to the concerned OA within

180 days of the effective date of part 26.

Section 26.37 What Are a Recipient's Responsibilities for Monitoring

the Performance of Other Program Participants?

The few comments on this section asked for more detail and

clarification. In the interest of flexibility, the Department is

reluctant to be prescriptive in the matter of monitoring and

enforcement mechanisms. What we are looking for is a strong and

effective set of monitoring and compliance provisions in each

recipient's DBE program. These mechanisms could be most anything

available to the recipient under Federal, state, or local law (e.g.,

liquidated damages provisions, responsibility determinations,

suspension and debarment rules, etc.)

One of the main purposes of these provisions is to make sure that

DBEs actually perform work committed to them at contract award. The

results that recipients must measure consist of payments actually made

to DBEs, not just promises at the award stage. Credit toward goals can

be awarded only when payments (including, for example, the return of

retainage payments) are actually made to DBEs. Under the final rule,

recipients would keep a running tally of the extent to which, on each

contract, performance had matched promises. Prime contractors whose

performance fell short of original commitments would be subject to the

compliance mechanisms the recipient had made applicable.

Section 26.41 What Is the Role of the Statutory 10 Percent Goal in

This Program?

This is a new section, intended to explain what role the 10 percent

statutory goal plays in the DBE program. Under former part 23, the 10

percent figure derived from the statute had a role in the setting of

overall goals by recipients. For example, if recipients had a goal of

less than 10 percent, the rule required them to make a special

justification.

This section makes clear that the 10 percent goal is an

aspirational goal that applies to the Department of Transportation on a

national level, not to individual recipients. It is a goal that the

Department can use to evaluate its overall national success in

achieving the objectives that Congress has established for this

program. However, the national 10 percent goal is not tied to

recipients' goal-setting decisions. Recipients set goals based on what

will achieve a level playing field for DBEs in their own programs,

without regard to the national goal. Recipients are not required to set

their overall or contract goals at 10 percent or any other particular

level. Recipients are no longer required to make a special

justification if their overall goals are less than 10 percent.

As discussed in connection with the Congressional debate on the

TEA-21 DBE provision, Congress viewed flexibility concerning the

statutory 10 percent goal as an important feature of narrow tailoring

and made clear that it was setting a national goal, not a goal for any

individual recipient. The Department wants to ensure that state and

local programs have sufficient flexibility to implement their programs

in a narrowly tailored way. This section is part of the Department's

effort toward that end.

Section 26.43 Can Recipients Use Quotas or Set-Asides as Part of This

Program?

The DBE program has often been labeled as a ``quota'' or ``set-

aside'' program, especially, though not exclusively, by its opponents.

This label is, and always has been, incorrect. Fifteen years ago, in

the preamble to the Department's first rule implementing a DBE statute,

the Department carefully

[[Page 5108]]

specified that neither quotas nor set-asides were required (see 48 FR

33437-38; July 21, 1983). This remains true today. However, in light of

Adarand and this year's Congressional debates on the DBE statutes, we

believe this point deserves additional emphasis. This regulation

prohibits quotas under any circumstances and makes clear that set-

asides can only be used as a means of last resort for redressing

egregious discrimination.

A number of non-DBE contractors and their organizations continued

to assert, in comments on the SNPRM, that the DBE program operates as a

quota program. This section makes clear that recipients cannot use

quotas on DOT-assisted contracts under any circumstances. A quota is a

simple numerical requirement that a recipient or contractor must meet,

without consideration of other factors. For example, if a recipient

sets a 12 percent goal on a particular contract and refuses to award

the contract to any bidder who does not have 12 percent DBE

participation, either refusing to look at showings of good faith

efforts or arbitrarily disregarding them, then the recipient has used a

quota. The Department's regulations have never endorsed this practice.

The issue of good faith efforts is discussed further below in

connection with Sec. 26.51.

A set-aside is a very specific tool. A contracting agency sets a

contract aside for DBEs if it permits no one but DBEs to compete for

the contract. Firms other than DBEs are not eligible to bid. The

Department's DBE program has never required the use of set-asides and

has allowed recipients to use set-asides only under very limited

circumstances.

Under the SNPRM, a recipient could use a set-aside on a DOT-

assisted contract only if other methods of meeting overall goals were

demonstrated to be unavailing and the recipient had legal authority

independent of part 26. Comments were divided concerning the use of

set-asides. A number of non-DBE contractors opposed the use of set-

asides, some of them saying that set-asides might be something they

could live with if their use were balanced by the elimination of DBE

contract goals on other contracts in the same field. Some recipients

and DBEs said, however, that set-asides were a useful tool to achieve

goals, particularly for start-up contractors or small contracts.

The Department has carefully reviewed these comments and continues

to believe that set-asides should not be used in the DBE program unless

they are absolutely necessary to address a specific problem when no

other means would suffice. If a recipient has been unable to remedy the

effects of egregious discrimination through other means, it may, as a

last resort, make limited use of set-asides to the extent necessary to

resolve the problem.

Section 26.45 How Do Recipients Set Overall Goals?

Since its inception, the recipient's overall goal has been the

heart of the DBE program. Responding to Adarand, DOT clarified the

theory and purpose of the overall goal in the SNPRM. In the proposed

rule, the Department made clear that the purpose of the overall goal--

and, in fact, the DBE program as a whole--is to achieve a ``level

playing field'' for DBEs seeking to participate in federal-aid

transportation contracting. To reach a level playing field, recipients

need to examine their programs and their markets and determine the

amount of participation they would expect DBEs to achieve in the

absence of discrimination and the effects of past discrimination. The

focus of the goal section of the SNPRM was to propose ways to measure

what a level playing field would look like and to seek input on the

availability of data to make such a measurement.

The Proposed Rule and Comments

The Department proposed several options that recipients might use

for setting overall goals, including three alternative formulas for

measuring the availability of ready, willing and able DBEs in local

markets. The specific formulas will be discussed below, but generally,

they each called for setting a goal that reflected the percentage of

locally available firms that were DBEs (i.e. dividing the number of

DBEs by the number of all businesses). On all of the alternatives, the

SNPRM sought comments on both the feasibility and practical value of

the options, as well as the prospects for combining any of the

approaches and the question of whether to mandate a single approach or

allow each recipient to choose amongst the options. We invited

commenters to propose changes to any of the details of the options or

to devise entirely new ones. Finally, we asked commenters for their

input on the availability of reliable data for use with each of the

options.

Hundreds of commenters of all types--including DBEs and non-DBEs,

prime and subcontractors, state and local recipients, industry and

interest groups and private individuals--responded with a wealth of

feedback, opinions and data. It is an understatement to say that there

was no consensus among commenters as to the best way to set overall

goals. Support for the proposed options was almost evenly spread over

the choices presented, with many commenters firmly against all of the

options. Still more suggested that the current, non-formulaic method

was the best way to ensure the flexibility to respond to local market

conditions. Similarly, among those who expressed an opinion, commenters

were split between the propriety of choosing a single ``best'' method

and imposing it on all recipients and allowing recipients to choose

amongst all the options. One of the few universal themes in the goal-

setting comments was the problem of the availability of reliable data

on the number of DBE and non-DBE contractors.

There were a few common threads that different groups of commenters

tended to apply to all of the formulas. Among recipients, many comments

focused on the lack of data about non-DBE contractors, especially

subcontractors. Recipients often noted that they would not have the

information needed for the denominator of any of the formulas (i.e. the

total number of available businesses). Non-DBE contractors--and

industry groups representing them--generally believed that there should

be a capacity measure built into any goal setting mechanism. Finally,

DBEs--and their industry associations--were concerned that all of the

formulas would create goals based only on the current number of DBEs,

locking in the effects of past discrimination by ignoring the fact that

the lack of opportunities in the past has suppressed the number of DBE

firms available today.

Under the proposed rule's Alternative 1, recipients would calculate

the percentage of DBE firms in their directories among all firms

available to work on their DOT-assisted contracts. Under Alternative 2,

recipients would calculate the percentage of all minority-and women-

owned firms in certain SIC codes in their areas among all firms in

these SIC codes in the same areas. Under Alternative 3, recipients

would calculate a percentage based on the average number of DBE firms

that had worked on their DOT-assisted contracts in recent years divided

by the average number of all firms that had worked on their DOT-

assisted contracts in the same period. The SNPRM also proposed that

recipients could use other means, such a disparity studies or goals

developed by other recipients serving the same area, as a basis for

their goals.

Each of the three proposed alternatives received some support,

though this was often the rather tepid endorsement of commenters who

felt that one or another alternative was the

[[Page 5109]]

best of a bad lot. Non-DBE contractors often claimed that the

alternatives would unfairly increase goals, while DBE contractors often

claimed that the same proposals would unfairly decrease goals.

Commenters said that data for determining the denominators of the

equations in Alternatives 1 and 2, as well as the numerator in

Alternative 2, did not exist and that it would be a major, time-

consuming job to begin to obtain the data. Adaptation of existing

information from other sources (e.g., Census data) was said to have

significant statistical difficulties. The difficulty of getting data on

out-of-state firms was emphasized in some comments.

Commenters looked on the alternatives as cumbersome, creating

unreasonable administrative burdens, and as producing statistical

results that were skewed in various ways. The use of DBE directories as

the source of the numerator in Alternative 1 was criticized on the

basis that directories may contain firms that never actually

participate in DOT-assisted contracts. It was suggested that the number

of firms bidding rather than the number of firms certified would be a

more reliable guide, but it was also pointed out that, because

subcontractors seldom formally bid for work, this data would be hard to

obtain. Some commenters proposed adding overall population statistics

to the mix.

A significant number of commenters--primarily non-DBE contractors,

but including some recipients and other commenters as well--emphasized

the need to take ``capacity'' into account. Most popular among these

comments was using a capacity version of Alternative 3. These comments

did not propose a method of determining the capacity of the firms

contracting with the recipient.

The Final Rule

In view of the complexity and importance of the goal setting

process and the many issues raised by commenters, the Department has

decided to adopt a two step process for goal setting. The process is

intended to provide the maximum flexibility for recipients while

ensuring that goals are based on the availability of ready, willing and

able DBEs in each recipient's relevant market. The Department believes

that this approach is critical to meeting our constitutional obligation

to ensure that the program is narrowly tailored to remedy the effects

of discrimination. The first step of the process will be to create a

baseline figure for the relative availability of ready, willing and

able DBEs in each recipient's market. The second step will be to make

adjustments from the base figure, relying on an examination of

additional evidence, past experience, local expertise and anticipated

changes in DOT-assisted contracting over the coming year.

Step 1: Determining a Base Figure for the Overall Goal

The base figure is intended to be a measurement of the current

percentage of ready, willing and able businesses that are DBEs.

Ensuring that this figure is based on demonstrable evidence of each

recipient's relevant market conditions will help to ensure that the

program remains narrowly tailored. To be explicit, recipients cannot

simply use the 10 percent national goal, their goal from the previous

year, or their DBE participation level from the previous year as their

base figure. Instead, all recipients must take an actual measurement of

their marketplace, using the best evidence they have available, and

derive a base figure that is as fair and accurate a representation as

possible of the percentage of available businesses that are DBEs.

There are many different ways to measure the contracting market and

assess the relative availability of DBEs. As discussed above, the SNPRM

proposed three alternate formulas to measure relative availability,

none of which were particularly popular with commenters. In this final

rule, the Department is placing primary emphasis on the principles

underlying the measurement, mandating only that a measurement of the

relative availability of DBEs be made on the basis of demonstrable

evidence of relevant market conditions, rather than requiring that any

particular procedure or formula be used. The final rule contains a

number of examples of how to create a base figure which recipients are

free to adopt in their entirety or to use as guidelines for how to

devise their own measurement.

There are several reasons we have taken this approach. First, the

Department is aware of the differences in available data in various

markets across the nation. The flexibility inherent in this approach

will ensure that all recipients can use the procedure to set a

reasonable goal and allow each recipient to use the best data available

to it. As discussed in another section, this rule will also provide for

the development of more standard data for future goal setting. Second,

for many recipients, setting goals in this way will be a new exercise.

By fixing only the basic principle, but allowing the methodology to

change, recipients will have the opportunity to fine tune the process

each year as their experience grows and the data available to them

improve. Finally, the rule makes sure that every recipient will have at

least one reasonable and practical goal setting method available to

them.

The first example for setting a base figure relies on data sources

that are immediately available to all recipients: their DBE

directories, and a Census Bureau database that DOT and the Census

Bureau will make available to all recipients that wish to use it. This

example has its roots in the first two goal setting formulas proposed

in the SNPRM. Recipients would first assess the number of ready,

willing and able DBEs based on their own directories. For some

recipients this will be as simple as counting the number of firms in

their directory. For others, particularly those using directories

maintained by other agencies, the directories will have to be

``filtered'' for firms involved in transportation contracting. The

resulting number of DBEs would become the numerator. The denominator

would then be derived from the Census Bureau's County Business Pattern

(CBP) database. We will provide user-friendly electronic access to the

database via the internet to allow recipients to input the geographic

area and SIC codes in which they contract and receive a number for the

availability of all businesses.

There are several issues that must be addressed when comparing

numbers derived from two different data sources, some of which were

raised in the comments on the SNPRM. Recipients will need to ensure

that the scope of businesses included in the numerator is as close as

possible to the scope included in the denominator. Using as close as

possible to the same SIC codes and geographic base is very important. A

recipient using its own DBE directory, particularly one that contains

only firms in the fields in which it contracts, will still need to

determine what fields it will use for the denominator when sorting

through the CBP database. The best way to do this would be to examine

their contracting program and determine the SIC codes in which they let

the substantial majority of their contracts and subcontracts. The

geographic area used for both the numerator and the denominator should

cover the area from which the recipient draws the substantial majority

of its contractors. While it may be sufficient for some state

recipients to use their state borders as their contracting area, local

transit and airport recipients will rarely have such an obvious choice.

Those recipients will need to more carefully examine the

[[Page 5110]]

geographic area from which they draw contractors and base their

calculation of both the numerator and denominator of the equation on

the same area.

The Department and the Census Bureau will make the CBP data

available in a format that gives recipients as much flexibility as

possible to tailor the data to their contracting programs. Recipients

will be able to extract the data in one block for all of the SIC codes

they expect to contract in, or by individual SIC codes, allowing them

to weight the relative availability of DBEs in various fields, giving

more weight to the fields in which they spend more money. For example,

let us assume a recipient estimates that it will expend 10% of its

federal aid funds within SIC code 15, 40% in SIC code 16, 25% in SIC

code 17, and the remaining 25% on contracting spread over SIC codes 07,

42 and 87. The recipient could separately determine the relative

availability of DBEs for each of the three major construction SIC codes

(i.e., 15, 16 and 17) and the relative availability of DBEs in the

other three SIC codes grouped together and weight each according to the

amount of money to be spent in each area. In this example, the

recipient could calculate its weighted base figure by first determining

the number of DBEs in its directory for each of the groups, then

extracting the availability of CBP businesses for the same groups. It

would then perform the following calculation to arrive at a base figure

for step one of the goal setting process:

[GRAPHIC] [TIFF OMITTED] TR02FE99.000

As has been stated generally, this formula is offered only as an

example of a way that a recipient could choose to use the CBP database.

Recipients using the CBP data should choose whether to weight their

calculation, and whether to do so by individual SIC codes or by groups

of SIC codes, based on their own assessment of what method will best

fit their spending pattern.\1\

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

The third example included in the final rule for setting a base

figure is using data derived from a disparity study. As was discussed

in the SNPRM, the Department is not requiring recipients to do a

disparity study, but is only making clear that use of disparity study

data by recipients that have them or choose to conduct them is a valid

means of setting a goal. Disparity studies generally contain a wide

array of statistical data, as well as anecdotal data and analysis that

can be particularly useful in the goal setting process. We list

disparity studies here, not because they are needed to justify

operating the DBE program--Congress has already established the

compelling need for the DBE program--but because the data a good

disparity study provides can be an excellent guide for a recipient to

use to set a narrowly tailored goal.

The Department will not set out specific requirements for what data

or analysis is required before a disparity study can be used for

setting a goal, because we believe that the design and conduct of the

study is best left to the local officials and the professional

organizations with which they contract to conduct the studies. Instead,

we again offer simple general principles that should apply to all

studies used for goal setting. Any study data relied on in the goal

setting process should be as recent as possible and be focussed on the

transportation contracting industry. When setting the goal, first use

the study's statistical evidence to set a base figure for the relative

availability of DBEs. Other study information, whether it is anecdotal

data, analysis or statistical information about related

[[Page 5111]]

fields, should be included when making adjustments to the base figure

(discussed in more detail below), but not included in the base figure

for the relative availability of DBEs.

The last specific example included in the rule is using the goal of

another recipient as the base figure for goal setting. This option was

also included in the SNPRM. It is intended to avoid duplicative work

and to lighten the burden the goal setting process might put on smaller

recipients. It is important to note that a recipient could only use

another recipient's goal if it was set in accordance with this rule and

the other recipient performed similar contracting in a similar market

area. Using another recipient's approved goal would only satisfy the

first step of the goal setting process. It would serve as the base

figure, and could not be used to skip over step two of the process. The

recipient would need to examine the same additional evidence it would

otherwise use to determine whether to adjust its goal from the base

figure, as well as being required to make adjustments to account for

differences in its local market or contracting program.

The final rule also maintains the option of devising an alternative

method of calculating a base figure for the goal setting process.

Explicitly listing this option serves to emphasize the point that the

options in the rule are examples meant as guidelines intended to ensure

maximum flexibility for recipients. Recipients can use this option to

take advantage of their unique expertise or any unique source of data

that they have that may not be available to other recipients. The

concerned operating administration will review and approve the

proposals of recipients that believe they can calculate a base figure

that will better reflect their relevant market than any of the examples

provided in this rule. Approval will be contingent on the proposals

following the same principles that apply to any recipient: the

methodology must be based on demonstrable data of relevant market

conditions and be designed to reach a goal that the recipient would

expect DBEs to achieve in the absence of discrimination.

Step 2: Adjusting the Base Figure

As alluded to above, measuring the relative availability of DBEs to

derive a base figure is only the first step of the goal setting

process. To ensure that they arrive at goals that truly and accurately

reflect the participation they would expect absent the effects of

discrimination, recipients must go beyond the formulaic measurement of

current availability to account for other evidence of conditions

affecting DBEs. To accomplish this second step, recipients must first

survey their jurisdiction to determine what types of relevant evidence

is available to them. Then, relying on their own knowledge of their

contracting markets they must review the evidence to determine whether

either an up or down adjustment from the base figure is needed.

One universally available form of evidence that all recipients

should consider is the proven capacity of DBEs to perform work on DOT-

assisted contracts. All recipients have been tracking and reporting the

dollar volume of work that is contracted and subcontracted to DBEs each

year. Viewed in isolation, the past achievements of DBEs do not reflect

the availability of DBEs relative to all available businesses, but it

is an important and current measure of the ability of DBEs to perform

on DOT-assisted contracts.

Though not universally available, there are hundreds of existing

disparity studies that contain a wealth of statistical and anecdotal

evidence on the utilization of disadvantaged businesses. In addition to

being a possible source of data for Step 1 of the goal setting process,

disparity studies should be considered during Step 2 of the process.

The base figure from Step 1 is intended to determine the relative

availability of DBEs. The data and analysis in a disparity study can

help a recipient determine whether those existing businesses are under-

or over-utilized. If a recipient has a study with disparity ratios

showing that existing DBEs are receiving significantly less work than

expected, an upward adjustment from the base figure is called for.

Similarly, if the disparity ratio shows overutilization, a downward

adjustment to the base figure would be warranted. The anecdotal

evidence and analysis of contracting requirements and conditions that

may have a discriminatory impact on DBEs are also important sources

that should be examined when determining what adjustment to make to the

base figure.\3\ Finally, disparity studies that are conducted within a

recipient's jurisdiction should be examined even if they were not done

specifically for the recipient. For example, a state highway agency may

find useful data and analysis in either a statewide disparity study

covering other agencies or in a disparity study examining contracting

in a county or city within the state.

---------------------------------------------------------------------------

\3\ It is important to note that adjusting the goal is only part

of the response a recipient should make to evidence of

discriminatory barriers for DBEs. All recipients have a primary

responsibility to ensure non-discrimination in their progrms and

should act aggressively to remove any discriminatory barriers in

their programs.

---------------------------------------------------------------------------

If a recipient uses another recipient's goal as its base figure

under Step 1 of the goal setting process, it will have to make

additional adjustments to ensure that its final goal is narrowly

tailored to its market and contracting program. For example, if a local

transit or airport authority adopts a statewide goal as its base

figure, it must determine the extent that local relative availability

of DBEs differs from the relative availability of DBEs in the

contracting area relied on by the state. The local recipient would also

need to examine the differences in the type of contracting work in its

program and determine whether there are significant differences in the

relative availability of DBEs in any fields that are unique to its

program--or unique to the program of the other recipient. Similarly, if

one local recipient used the goal of another local recipient in the

same market as its base figure, it would also need to adjust for

differences in the contracting fields used by the two programs.

Finally, the rule contains a brief list of other types of data a

recipient could consider when adjusting its base figure to arrive at an

overall goal. The list is by no means intended to be exhaustive.

Instead, it is meant as a guide to the types of information a recipient

should look for in Step 2 of the goal setting process. There is a wide

array of relevant local, regional and national information about the

utilization of disadvantaged businesses. Recipients are encouraged to

cast as wide a net as they can to carefully examine their contracting

programs and the public and private markets in which they operate.

Additional Goal Setting Issues

The Department proposed, in both the 1992 NPRM and the 1997 SNPRM,

that overall goals be calculated as a percentage of DOT funds a

recipient expects to expend in DOT-assisted contracts. This is

different from the existing part 23 rule, which asked recipients to set

overall goals on the basis of all funds, including state and local

funds, to be expended in DOT-assisted contracts. This change is for

accounting and administrative convenience and is not intended to have a

substantive effect on the program. While not the subject of many

comments, those who did comment on the proposal favored the change. The

final rule adopts this approach.

A few recipients commented that public participation concerning

goal setting was bothersome. Nevertheless,

[[Page 5112]]

we view it as an essential part of the goal setting process. There are

many stakeholders involved in setting goals, and it is reasonable that

they should be involved in the process and have an opportunity for

comment. The part 23 provision requiring getting a state governor's

approval of a goal of less than 10 percent has been eliminated, both

because overall goals are no longer tied to the national 10 percent

goal and to reduce administrative burdens.

The goal setting provision of the final rule continues to direct

recipients to set one annual overall goal for DBEs, rather than group-

specific goals separating minority and women-owned businesses.

Section 26.47 Can Recipients Be Penalized for Failing To Meet Overall

Goals?

This is a new section of the regulation, the purpose of which is to

clarify the Department's views on the situations in which it is

appropriate to impose sanctions on recipients with respect to goals.

The provision states explicitly what has long been the Department's

policy: no recipient is sanctioned, or found in noncompliance, simply

because it fails to meet its overall goal. In fact, through the history

of the DBE program, the Department never has sanctioned a recipient for

failing to obtain a particular amount of DBE participation.

On the other hand, if a recipient fails to set an overall goal

which the concerned operating administration approves, or fails to

operate its program in good 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 Sec. 26.101(b)).

Section 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

Sec. 26.45 of this rule.

Section 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

[[Page 5113]]

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.

Section 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

[[Page 5114]]

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

[[Page 5115]]

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.

Section 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

[[Page 5116]]

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.

Section 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.

Section 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.

Section 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 commenters 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

[[Page 5117]]

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.

Section 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 avo

This text is long and has been trimmed here. Open the source document for the complete record.