A new U.S. Dept. of Transportation rule upends the decades-old program designed to address discrimination in government contracting in a move that agency officials say will level the playing field for small contractors. But the change has created uncertainty for many industry firms over lack of clarity in program requirements and the risk of reduced competition going forward.
The interim final rule, published Oct. 3 in the Federal Register, removes sex- and race-based presumptions from the definition of a “socially and economically disadvantaged individual” under the disadvantaged business enterprise (DBE) program. Instead, DBE owners must demonstrate “individualized” social and economic disadvantage to participate in the program, without reference to race or sex.
In an unusual move, DOT published the interim final rule without either first publishing a proposed rule and without holding a public comment period. Instead, the rule took effect immediately with its publication in the Federal Register, and the department said it would take public comments for one month.
Taking public comments in advance “would be impracticable, unnecessary, and contrary to the public interest” because the prior standard was unconstitutional, DOT wrote in the Federal Register.
Transportation Secretary Sean Duffy’s «position on the DBE program is clear—subsidizing infrastructure contracts with taxpayer dollars based on discriminatory principles is unconstitutional, counter to civil rights laws, and a waste of taxpayer resources,” DOT said in a statement.
President Ronald Reagan signed the DBE program into law in 1983 to help small businesses owned by members of historically disadvantaged groups compete for a share of work on federally supported transportation projects. To ensure firms are disadvantaged, the program includes caps on factors such as the owner’s net worth.
But removing the presumptive factors in disadvantage risks discouraging participation, reducing competition and limiting diversity in the pool of qualified contractors, wrote Women’s Transportation Seminar, a construction industry group that advocates for women in the sector, in a comment on the rule.
“Many small, women-owned businesses will find it significantly harder to demonstrate ‘individualized social and economic disadvantage’ through burdensome documentation and narratives, despite the clear existence of systemic inequities that persist in the industry,” the group said.
Wendell Stemley, president of the National Association of Minority Contractors, says it is important that small businesses remain part of procurement on public infrastructure projects. The industry needs to welcome small entrepreneurs and innovators to remain globally competitive, he adds, but rules like this risk making it more difficult for new businesses to enter the industry.
“We can’t get to a point where we’re shrinking the marketplace as the world is opening up [its] marketplace and making more entrepreneurs … or we’re going to keep falling farther and farther behind,” Stemley says.
Certification Review
The rule requires that state programs that certify DBE firms, known as Unified Certification Programs, use the new standard to reevaluate every DBE firm previously certified, and to recertify or decertify firms accordingly.
“It’s a major undertaking,” says Rich Juliano, general counsel at the American Road and Transportation Builders Association. The narratives to show disadvantage represent a new procedure that Unified Certification Programs will need to explain to contractors and provide specificity in terms of what they’re looking for, although state DOT officials have indicated they are also seeking clarification on that.
Another challenge will be the number of firms in question—in the rule, DOT estimates 41,000 DBE contractors that will need to have their certification reviewed.
The department directed Unified Certification Programs to complete reviews “as quickly as practicable” and said it would work with them to minimize the practical impact of the rule change—noting that certifying agencies “may experience increased numbers of intake inquiries and clarification requests.”
Contractors need clarity from their respective state transportation agencies on how the rule will be approached, and the state DOTs need clarity from the federal DOT, Juliano says, especially given how many firms work in multiple states.
“You don’t want a situation where you’re in one state and you go across the border and this is being handled differently, or expectations are different, or certification parameters are a lot different,” he says. “You do need some consistency there.”
Stemley expects most existing DBE firms will be able to qualify under the new standards. Impacts of slavery, as well as post-slavery laws and practices such as redlining that limited African-Americans’ property ownership, have limited wealth across generations, he says. Other groups have also faced adversity, such as Native Americans whose historic lands were taken by the U.S. and Japanese-Americans whose property was seized during World War II. Their descendants are missing out on generational wealth “that others are thriving from,” Stemley adds.
“I don’t think people will have a hard time recertifying into disadvantaged status without a presumption,” he says. “But then, what does it actually mean if the opportunities are fewer, and the opportunities are diluted?”
In the meantime, recipients of federal transportation funding may not set any DBE contracting goals, DOT wrote in the rule, effectively suspending all state DBE programs temporarily.
“This provision ensures that existing DBEs do not continue to receive any benefits as a result of their certification under the old standards,” the federal agency wrote.
Following release of the rule, state DOTs have begun notifying contractors that they are suspending DBE goals and tracking. Several said they are seeking guidance from federal DOT on steps to take and whether the rule applies to projects begun prior to the rule taking effect.
Immediate Effect
DOT pointed to executive orders from President Donald Trump and a memo from Attorney General Pam Bondi as directives requiring the new rule. The department has also sought to have a judge declare its DBE program unconstitutional as part of a proposed settlement in a federal lawsuit in Kentucky brought by Jeffersonville, Ind.-based Mid-America Milling Co. LLC and Memphis, Ind.-based Bagshaw Trucking Inc.
The judge in that case has signaled he may find the DBE program to be unconstitutional but has not yet made a decision. It is possible the judge could ask parties to revise the proposed consent order, or rule in an unexpected way.
“If he did anything short of approving the order as it’s proposed to him, that could further complicate the situation,” Juliano says.
Comments so far have had a mixed reception to the rule, but a common theme among many was requests for clarification. One New Jersey-based contractor, which requested that DOT institute a transition period to reduce hardships on companies and their employees working on impacted projects, said some agencies have already canceled contracts and issued stop work orders as a result of the rule.
“The interim final rule was issued without thought and consideration to how federally funded projects and companies/employees working on those projects are affected,” the contractor wrote in a comment on the rule.
Others asked DOT to go further with the rule. One California road safety contractor wrote in a comment that the agency should eliminate social disadvantage as a consideration entirely.
Funding Freezes
The rule has also come with the threat of federal project funding being withheld or canceled. Two days before the rule appeared in the Federal Register, DOT announced that it was freezing $18 billion in funding for the Second Avenue Subway Phase 2 and Hudson Tunnel Project in the New York City area to review DBE practices in light of the rule.
On the day it published the rule, DOT also announced a freeze of $2.1 billion for the Red Line Extension and Red and Purple Line Modernization in Chicago for a similar review.
“The federal government wants to immediately ‘review’ our compliance with rules they told us about moments ago,” John McCarthy, NY Metropolitan Transportation Authority chief of policy and external relations, said in a statement on the day of the federal DOT announcement.
Staff responsible for conducting those reviews have been furloughed, according to DOT. It was not clear how long the reviews might take.
