Feds Issue New DBE Reg's — Part III

As discussed in the first two of this series, the United States Department of Transportation has issued a final rule revising its Disadvantaged Business Enterprise program. The new rule, which went into effect on March 4, 1999, constitutes an attempt to preserve set-asides for disadvantaged businesses in the face of the United Supreme Court holding in Adarand Constructors, Inc. v. Peña, which required all race-based preference programs to meet a stringent set of tests in order to be constitutional.

USDOT believes that one of the requirements of a constitutional DBE program is a race neutral approach that promotes participation by DBEs and other small businesses in their contracting programs. To make this happen, the new rule provides that a recipient (e.g., the Oregon Department of Transportation or the Port of Portland) may, or may be required to, establish a DBE Business Development Program (BDP). The primary purpose of the BDP is to assist firms in gaining the ability to compete successfully in the marketplace outside of the DBE program. As part of a BDP recipients may establish a mentor/protégé program.

Many contractor groups, including the Associated General Contractors, believe as a matter of policy that mentor-protégé programs are a more effective way to deal with discrimination in the construction industry than traditional DBE programs. The new Rule explicitly rejects that contention.

"Standing alone, mentor-protégé 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-protégé program requires close monitoring to guard against abuse, which further limits the number of DBEs they can assist."

Further, under the new rule, the requirements for approved mentor-protégé programs are draconian. Only firms previously certified as DBEs can be protégés. If the mentor is not itself a DBE, it can not get credit for more than half its goal on any contract by use of its protégé. Furthermore, the mentor cannot get DBE credit for using its protégé on more than every other contract performed by that protégé. If a non-DBE mentor uses its protégé to perform a subcontract on a project and counts all or a portion of that protégé's work against the mentor's goal on that project, the mentor can not count the protégé's work on another project until the protégé has first worked on an intervening prime contract or subcontract for a different prime contractor. In essence, the new rule requires the mentor to train and aid a DBE with the expectation that the DBE will then help a competitor. This is likely to have a chilling effect on most potential non-DBE mentors. However, potential DBE mentors may be encouraged by a provision that provides that mentors and protégés will not be treated as affiliates of one another for size determination purposes.

Mentors aren't alone in their distaste for the requirements of the new rule. Recipients are concerned about the "resource intensive" monitoring provisions, and DBE's balk at requirements that, as a condition of participating in the program, they agree to terminate their participation in the DBE program after a set time, or once certain administrative objectives have been reached. It is one thing to "graduate" out of DBE status when the personal net worth of the owner climbs past $750,000, or the three-year average of the DBE's billings approach $20 million. It is something else entirely to agree to give up one's DBE status simply by the passage of time or the completion of some administrative steps.

In response, the AGC has launched a significant effort to convince USDOT to approve established mentor/protégé plans like the Port of Portland's Stempel Plan. Alternatively, recipients who already have mentor-protégé programs may make them a part of their revised DBE program by getting approval from the operating administration within 180 days of March 4, 1999.

With this in mind, it is interesting to look at other, friendlier models for setting up mentoring programs. For example, the US Small Business Administration's §8(a) programs are designed to see to it that the mentor can and does provide reasonable assistance and support to enable the protégé to meet its developmental needs and goals and graduate from DBE status. To participate in the program, a potential mentor (who must be a §8(a) graduate) must certify that it has the ability and desire to impart knowledge to the protégé. For its part, the protégé must show it is undercapitalized, needs to train its personnel, does not own all of the equipment it needs, and requires management and technical help in key areas.

When these conditions are met, the mentor will typically commit to:

• Loaning working capital to the protégé and, on a case-by-case basis, making equity investments in the protégé and/or indemnifying the protégé's surety to allow the protégé to secure bonding.
• Renting the protégé equipment at competitive rates.
• Providing key management and supervisory employees to counsel and advise the protégé.
• Subcontract work to the protégé.
• Subcontract work from the protégé when appropriate, or when such an arrangement would enable the protégé to be more capable and competitive.

Until USDOT recognizes the chilling effect of the requirements of the new rule, mentor/protégé programs are unlikely to be widely used under the new rule.

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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