Feds Issue New DBE Reg's — Part I

This is the first in a series of articles discussing the 1999 US Department of Transportation Disadvantaged Business Enterprise Regulations.

Most special preferences in public contracting have their roots in now out-of-date United States Department of Transportation (USDOT) funding bills requiring local governments to set up "disadvantaged business enterprise" (DBE) programs in order to receive federal highway funds. These set-asides for disadvantaged, minority, and woman-owned businesses are a highly charged political issue and, for years, were thought to create an unfair edge in competing for public jobs. In 1995, the U S Supreme Court used Adarand Constructors, Inc. v. Peña, to extend to all levels of government an earlier holding in the Croson case requiring that race-based preference programs demonstrate:

• a compelling governmental interest in remedying prior discrimination on the part of the public body;
• that such discrimination cannot be remedied by race-neutral means; and
• that the remedy is narrowly tailored to the level of race discrimination found.

Adarand did not kill any DBE programs. All the Supreme Court did was establish legal criteria for analyzing whether a given program is constitutional. As a result, on a nationwide basis, DBE programs have been chilled. Although most states, including Oregon, continue to require DBE "goals" on their federal aid projects, they face the risk of a losing court battle if contractors or construction trade associations challenge their programs. Adarand, and its fallout, has led to a significant decline in DBE participation.

In line with the administration's policy to "mend, not end" special preferences, the USDOT responded to Adarand on February 2, 1999, by issuing new "flexible" regulations. Under the new regulations, a state DOT may choose its own methods of goal setting, take local market conditions into account, and base its goals on evidence it believes best reflects local conditions. In its preamble to the new regulations, the USDOT states that goals set up under the new guidelines will not be treated as quotas or set-asides, and specifically assures state DOTs that they will not be in noncompliance simply because their DBE participation falls short of their overall goal.

In this and the following two articles we will discuss the details of these new regulations, including their practical effect on public-sector bidding. As an overview, the new regulations contain the following key provisions:

• Procedures have been included to provide exemptions and waivers from DBE requirements. In theory, state DOT's may avoid any provision in the regulations by requesting an exemption in writing. This exemption process is discussed in the regulations as an important safeguard because it allows measured responses to unique local situations. It seems unlikely, however, that USDOT will grant exemptions other than in unique circumstances with no broad applicability.
• Very strict controls over "advisory opinions" by USDOT officials have been implemented. After March 4, 1999, only guidance and interpretations from the Secretary of Transportation or the General Counsel of the USDOT will have any effect.
• Prompt payment provisions applicable to DBEs are now required in federal aid contracts.
• States are required to reduce the overconcentration of DBE's in certain specialty subcontracting fields. For example, if DBEs dominate the guardrail installation specialty, state DOTs have to see that more non-DBE firms can compete install guardrails.
• Business development and mentor/protégé programs have been formally acknowledged, although with restrictions that are likely to make them rarely used.
• DBE "goals" must be based on demonstrable evidence of the availability of "ready, willing, and able" DBE firms. State DOT's can no longer rely on a 10% national goal, past goals, or any other arbitrary approach. Targeted studies are likely to be necessary.
• The maximum feasible portion of the goals must be met through race-neutral means. This is an important linchpin in the constitutionality of the new regulations.
• "Good-faith efforts" must be taken seriously by state DOT's. Attempts by general contractors to meet special preference requirements through good faith efforts may not be rejected merely because the contractors do not meet the goal.
• Changes in the method by which DBE participation is analyzed in trucking and "commercially useful function" analysis have been made.

These new regulations will sunset in 2004 unless reauthorized by Congress at that time.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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