[Federal Register Volume 64, Number 21 (Tuesday, February 2, 1999)]
[Rules and Regulations]
[Pages 5096-5148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1083]



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Part II





Department of Transportation





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Office of the Secretary



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49 CFR Parts 23 and 26



Participation by Disadvantaged Business Enterprises in Department of 
Transportation Programs; Final Rule

  Federal Register / Vol. 64, No. 21 / Tuesday, February 2, 1999 / 
Rules and Regulations  

[[Page 5096]]



DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR Parts 23 and 26

[Docket OST-97-2550; Notice 97-5]
RIN 2105-AB92


Participation by Disadvantaged Business Enterprises in Department 
of Transportation Programs

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule revises the Department of Transportation's 
regulations for its disadvantaged business enterprise (DBE) program. 
The DBE program is intended to remedy past and current discrimination 
against disadvantaged business enterprises, ensure a ``level playing 
field'' and foster equal opportunity in DOT-assisted contracts, improve 
the flexibility and efficiency of the DBE program, and reduce burdens 
on small businesses. This final rule replaces the former DBE 
regulation, which now contains only the rules for the separate DBE 
program for airport concessions, with a new regulation. The new 
regulation reflects President Clinton's policy to mend, not end, 
affirmative action programs. It modifies the Department's DBE program 
in light of developments in case law requiring ``narrow tailoring'' of 
such programs and last year's Congressional debate concerning the 
continuation of the DBE program. It responds to comments on the 
Department's December 1992 notice of proposed rulemaking (NPRM) and its 
May 1997 supplemental notice of proposed rulemaking (SNPRM).

DATES: This rule is effective 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

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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

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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 avoiding a retroactive paperwork burden 
on firms that are now certified, the rule does not require recipients 
to obtain this information from currently certified firms. These firms 
would submit the information the next time they apply for renewal or 
recertification. The final rule's provisions on calculating personal 
net worth are derived directly from SBA regulations on this subject 
(see 13 CFR Sec. 124.104(c)(2), as amended on June 30, 1998).
    One of the primary concerns of DBE firms commenting about 
submitting personal financial information is ensuring that the 
information remains confidential. In response to this concern, the rule 
explicitly requires that this material be kept confidential. It may be 
provided to a third party only with the written consent of the 
individual to whom the information pertains. This provision is 
specifically intended to pre-empt any contrary application of state or 
local law (e.g., a state freedom of information act that might be 
interpreted to require a state transportation agency to provide to a 
requesting party the personal income tax return of a DBE applicant who 
had provided the return as supporting documentation for his PNW 
statement). There is one exception to this confidentiality requirement. 
If there is a certification appeal in which the economic disadvantage 
of an individual is at issue (e.g., the recipient has determined that 
he or she is not economically disadvantaged and the individual seeks 
DOT review of the decision), the personal financial information would 
have to be provided to DOT as part of the administrative record. The 
Department would treat the information as confidential.
    Creating a clear and definitive standard for determining when an 
individual has overcome the economic disadvantage that the DBE program 
is meant to remedy has long been a contentious issue. In 1992, the 
Department proposed to use a personal net worth standard of $750,000 to 
rebut the presumption of disadvantage for members of the designated 
groups. In 1997, the Department proposed a similar idea, though rather 
than use the $750,000 figure, the SNPRM asked the public for input on 
what the specific amount should be. Finally, as discussed in detail 
above, the issue of ensuring that wealthy individuals do not 
participate in the DBE program was a central part of the 1998 
Congressional debate.
    Public comment on both proposals was sharply divided. Roughly equal 
numbers of commenters thought $750,000 was too high as thought it was 
too low. Commenters proposed figures ranging from $250,000 to $2 
million. Others supported the $750,000 level, which is based on the 
SBA's threshold for participation in the SDB program (it is also the 
retention level for the 8(a) program). One theme running through a 
number of comments was that recipients should have discretion to vary 
the threshold depending on such factors as the local economy or the 
type of firms involved. Some comments opposed the idea of a PNW 
threshold altogether or suggested an alternative approach (e.g., based 
on Census data about the distribution of wealth).
    Others commented that rebutting the presumption did not go far 
enough, pointing out that the only way to ensure that wealthy people 
did not participate in the program was for the threshold to act as a 
complete bar on the eligibility of an individual to participate in the 
program. Congress appears to share this concern. While they differed on 
the effectiveness of past DOT efforts, both proponents and opponents of 
the program agreed that preventing the participation of wealthy 
individuals was central to ensuring the constitutionality of the DBE 
program.
    The Department agrees and, in light of the comments and the 
intervening TEA-21 debate, is adopting the clearest and most effective 
standard available: when an individual's personal net worth exceeds the 
$750,000 threshold, the presumption of economic disadvantage is 
conclusively rebutted and the individual is no longer eligible to 
participate in the DBE program. The Department is using the $750,000 
figure because it is a well established and effective part of the SBA 
programs and is a reasonable middle ground in view of the wide range of 
comments calling for higher or lower thresholds. Using a figure any 
lower, as some commenters noted, could penalize success and make growth 
for DBEs difficult (since, for example, banks and insurers frequently

[[Page 5118]]

look to the personal assets of small business owners in making lending 
and bonding decisions). Operating the threshold as a cap on eligibility 
for all applicants also serves to treat men and women, minorities and 
non-minorities equally.
    When a recipient determines, from the PNW statement and supporting 
information, that an individual's personal net worth exceeds $750,000, 
the recipient must deem the individual's presumption of economic 
disadvantage to have been conclusively rebutted. No hearing or other 
proceeding is called for in this case. When this happens in the course 
of an application for DBE eligibility, the certification process for 
the applicant firm stops, unless other socially and economically 
disadvantaged owners can account for the required 51 percent ownership 
and control. A recipient cannot count the participation of the owner 
whose presumption of economic disadvantage has been conclusively 
rebutted toward the ownership and control requirements for DBE 
eligibility.
    There may be other situations in which a recipient has a reasonable 
basis (e.g., from information in its own files, as the result of a 
complaint from a third party) for believing that an individual who 
benefits from the statutory presumptions is not really socially and/or 
economically disadvantaged. In these cases, the recipient may begin a 
proceeding to rebut the presumptions. For example, if a recipient had 
reason to believe that the owner of a currently-certified firm had 
accumulated personal assets well in excess of $750,000, it might begin 
such a proceeding. The recipient has the burden of proving, by a 
preponderance of evidence, that the individual is not disadvantaged. 
However, the recipient may require the individual to produce relevant 
information.
    It is possible that, at some time in the future, SBA may consider 
changing the $750,000 cap amount. The Department anticipates working 
closely with SBA on any such matter and seeking comment on any 
potential changes to this rule that would be coordinated with changes 
SBA proposes for Federal procurement programs in this area.
    Under part 23, recipients had to accept 8(a)-certified firms 
(except for those who exceeded the statutory gross receipts cap). The 
SNPRM proposed some modifications of this requirement. Recipients were 
concerned that in some situations information used for 8(a) 
certification could be inaccurate or out of date. They noted 
differences between 8(a) and DBE certification standards and 
procedures. They asked for the ability to look behind 8(a) 
certifications and make their own certification decisions.
    In response to these comments, the Department is providing greater 
discretion to recipients. Under part 26, recipients can treat 8(a) 
certifications as they do certifications made by other DOT recipients. 
A recipient can accept such a certification in lieu of conducting its 
own certification process or it can require the firm to go through part 
or all of its own application process. Because SBA is beginning a 
certification process for firms participating in the small and 
disadvantaged business (SDB) program, we will treat certified SDB firms 
in the same way. If an SDB firm is certified by SBA or an organization 
recognized by SBA as a certifying authority, a recipient may accept 
this certification instead of doing its own certification. (This does 
not apply to firms whose participation in the SDB program is based on a 
self-certification.) We note that this way of handling SBA program 
certifications is in the context of the development by DOT recipients 
of uniform certification programs. If a unified certification program 
(UCP) accepts a firm's 8(a) or 8(d) certification, then the firm will 
be certified for all DOT recipients in the state.
    People who are not presumed socially and economically disadvantaged 
can still apply for DBE certification. To do so, they must demonstrate 
to the recipient that they are disadvantaged as individuals. Using the 
guidance provided in Appendix E, recipients must make case-by-case 
decisions concerning such applications. It should be emphasized that 
the DBE program is a disadvantage-based program, not one limited to 
members of certain designated groups. For this reason, recipients must 
take these applications seriously and consider them fairly. The 
applicant has the burden of proof concerning disadvantage, however.

Section 26.69  What Rules Govern Determinations of Ownership?

    Commenters on the ownership provisions of the SNPRM addressed a 
variety of points. Most commenters agreed that the general burden of 
proof on applicants should be the preponderance of the evidence. A few 
commenters thought that this burden should also apply in situations 
where a firm was formerly owned by a non-disadvantaged individual. For 
some of these situations, the SNPRM proposed the higher ``clear and 
convincing evidence'' standard, because of the heightened opportunities 
for abuse involved. The Department believes this safeguard is 
necessary, and we will retain the higher standard in these situations.
    Commenters asked for more guidance in evaluating claims that a 
contribution of expertise from disadvantaged owners should count toward 
the required 51 percent ownership. They cited the potential for abuse. 
The Department believes that there may be circumstances in which 
expertise can be legitimately counted toward the ownership requirement. 
For example, suppose someone with a great deal of expertise in a 
computer-related field, without whom the success of his or her high-
tech start-up business would not be feasible, receives substantial 
capital from a non-disadvantaged source.
    We have modified the final rule provision to reflect a number of 
considerations. Situations in which expertise must be recognized for 
this purpose are limited. The expertise must be outstanding and in a 
specialized field: everyday experience in administration, construction, 
or a professional field is unlikely to meet this test. (This is not a 
``sweat equity'' provision.) We believe that it is fair that the 
critical expertise of this individual be recognized in terms of the 
ownership determination. At the same time, the individual must have a 
significant financial stake in the company. This program focuses on 
entrepreneurial activity, not simply expertise. While we will not 
designate a specific percentage of ownership that such an individual 
must have, entrepreneurship without a reasonable degree of financial 
risk is inconceivable.
    The SNPRM's proposals on how to treat assets obtained through 
inheritance, divorce, and gifts were somewhat controversial. Most 
comments agreed with the proposal that assets acquired through death or 
divorce be counted. One commenter objected to the provision that such 
assets always be counted, saying that the owner should have to make an 
additional demonstration that it truly owned the assets before the 
recipient counted them. We do not see the point of such an additional 
showing. If a white male business owner dies, and his widow inherits 
the business, the assets are clearly hers, and the deceased husband 
will play no further role in operating the firm. Likewise, assets a 
woman obtains through a divorce settlement are unquestionably hers. 
Absent a term of a divorce settlement or decree that limits the 
customary incidents of ownership of the assets or business (a 
contingency for which the proposed provision provided), there is no 
problem for which an additional showing of some

[[Page 5119]]

sort by the owner would be a useful remedy.
    A majority of comments on the issue of gifts opposed the SNPRM 
proposal, saying that gifts should not be counted toward ownership at 
all. The main reason was that allowing gifts would make it easier for 
fronts to infiltrate the program. Some comments also had a flavor of 
opposition to counting what commenters saw as unearned assets. The 
Department understands these concerns. If a non-disadvantaged 
individual who provides a gift is no longer connected with the 
business, or a disadvantaged individual makes the gift, the issue of 
the firm being a potential front is much reduced. Where a non-
disadvantaged individual makes a gift and remains involved with the 
business, the concern about potential fronts is greater.
    For this reason, the SNPRM erected a presumption that assets 
acquired by gift in this situation would not count. The applicant could 
overcome this presumption only by showing, through clear and convincing 
evidence--a high standard of proof--that the transfer was not for the 
purpose of gaining DBE certification and that the disadvantaged owner 
really controls the company. This provides effective safeguards against 
fraud, without going to the unfair extreme of creating a conclusive 
presumption that all gifts are illegitimate. Also, for purposes of 
ownership, all assets are created equal. If the money that one invests 
in a company is really one's own, it does not matter whether it comes 
from the sweat of one's brow, a bank loan, a gift or inheritance, or 
hitting the lottery. As long as there are sufficient safeguards in 
place to protect against fronts--and we believe the rule provides 
them--the origin of the assets is unimportant. We are adopting the 
proposed provisions without change.
    Commenters were divided about how to handle marital property, 
especially in community property states. Some commenters believed that 
such assets should not be counted at all. This was based, in part, on 
the concern that allowing such assets to be counted could make it 
difficult to screen out interspousal gifts designed to set up fronts, 
even if irrevocable transfers of assets were made. Other commenters 
said they thought the proposal was appropriate, and some of these 
thought the requirement for irrevocable transfers was unfair.
    The Department is adopting the proposed language. In a community 
property state, or elsewhere where property is jointly held between 
spouses, the wife has a legal interest in a portion of the property. It 
is really hers. It would be inappropriate to treat this genuine 
property interest as if it did not exist for purposes of DBE ownership.
    To ensure the integrity of the program, it is necessary to put 
safeguards in place. The regulation does so. First, recipients would 
not count more assets toward DBE ownership than state law treats as 
belonging to the wife (the final rule provision adds language to this 
effect). Second, the irrevocable transfer requirement prevents the 
husband from being in a position to continue to claim any ownership 
rights in the assets. If an irrevocable transfer of assets constitutes 
a gift from a non-disadvantaged spouse who remains involved in the 
business, then the presumption/clear and convincing evidence mechanism 
discussed above for gifts would apply to the transaction. If recipients 
in community property states wanted to establish a mechanism for 
allocating assets between spouses that was consistent with state law, 
but did not require court involvement or other more formal procedures, 
they could propose doing so as part of their DBE programs, subject to 
operating administration approval.
    Most commenters supported the SNPRM's proposal concerning trusts, 
particularly the distinction drawn between revocable living and 
irrevocable trusts. One commenter favored counting revocable living 
trusts when the same disadvantaged individual is both the grantor and 
beneficiary. The Department believes there is merit in making this 
exception. If the same disadvantaged individual is grantor, 
beneficiary, and trustee (i.e., an individual puts his own money in a 
revocable living trust for tax planning or other legitimate purposes 
and he alone plays the roles of grantor, beneficiary, and trustee), the 
situation seems indistinguishable for DBE program purposes from the 
situation of the same individual controlling his assets without the 
trust. In all other situations, revocable living trusts would not 
count.
    Some comments asked for clarification of the 51 percent ownership 
requirement, a subject on which the Department has received a number of 
questions over the years. The Department has clarified this 
requirement, with respect to corporations, by stating that socially and 
economically disadvantaged individuals must own 51 percent of each 
class of voting stock of a corporation, as well as 51 percent of the 
aggregate stock. A similar point applies to partnerships and limited 
liability companies. This latter type of company was not mentioned in 
the SNPRM, but a commenter specifically requested clarification 
concerning it. (We have also noted, in Sec. 26.83, that limited 
liability companies must report changes in management responsibility to 
recipients. This is intended to include situations where management 
responsibility is rotated among members.) These clarifications are 
consistent with SBA regulations.
    There are some ownership issues (e.g., concerning stock options and 
distribution of dividends) that SBA addresses in some detail in its 
regulations (see 13 CFR Sec. 124.105 (c), (e), (f)) that were not the 
subject of comments to the DOT SNPRM. These issues have not been 
prominent in DOT certification practice, to the best of our knowledge, 
so we are not adding them to the rule. However, we would use the SBA 
provisions as guidance in the event such issues arise.

Section 26.71  What Rules Govern Determinations Concerning Control?

    Commenters generally agreed with the proposed provisions concerning 
expertise and delegation of responsibilities, 51 percent control of 
voting stock, and differences in remuneration. A few commenters 
expressed concern about having to make judgments concerning expertise. 
However, this expertise standard, as a matter of interpretation, has 
been part of the DBE program since the mid-1980s. We do not believe 
that articulating it in the regulatory text should cause problems, and 
we believe it is a very reasonable and understandable approach to 
expertise issues. The provision concerning 51 percent ownership of 
voting stock, as discussed above, has been relocated in the ownership 
section of the rule. The Department has added three useful 
clarifications of the general requirement that disadvantaged owners 
must control the firm (e.g., by serving as president or CEO, 
controlling a corporate board). These clarifications are based on SBA's 
regulations (see 13 CFR Sec. 124.106(a)(2), (b), (d)(1)). The 
Department intends to use other material in 13 CFR Sec. 124.106 as 
guidance on control matters, when applicable. Otherwise, the Department 
is adopting these provisions as proposed.
    There was some concern about the proposal concerning licensing. 
Some recipients thought that it would be better to require a license as 
proof of control in the case of all licensed occupations. We do not 
think it is justifiable for the DBE program to require more than state 
law does. If state law allows someone to run a certain

[[Page 5120]]

type of business (e.g., electrical contractors, engineers) without 
personally having a license in that occupation, then we do not think it 
is appropriate for the recipient to refuse to consider that someone 
without a license may be able to control the business. The rule is very 
explicit in saying that the recipient can consider the presence or 
absence of a license in determining whether someone really has 
sufficient ability to control a firm.
    Family-owned firms have long been a concern in the program. The 
SNPRM provided explicitly that if the threads of control in a family-
run business cannot be disentangled, such that the recipient can 
specifically find that a woman or other disadvantaged individual 
independently controls the business, the recipient may not certify the 
firm. A business that is controlled by the family as a group, as 
distinct from controlled individually by disadvantaged individuals, is 
not eligible. Notwithstanding this provision, a few recipients 
commented that certifying any businesses in which non-disadvantaged 
family members participate would open the program to fronts. We do not 
agree. Non-disadvantaged individuals can participate in any DBE firm, 
as long as disadvantaged individuals control the firm. It is not fair 
and does not achieve any reasonable program objective to say that an 
unrelated white male may perform functions in a DBE while the owner's 
brother may never do so.
    Commenters generally supported the provision calling for recipients 
to certify firms only for types of work in which disadvantaged owners 
had the ability to control the firm's operations. One commenter 
suggested that recipients, while not requiring recertification of firms 
seeking to perform additional types of work as DBEs (e.g., work in 
other than their primary industrial classification), should have to 
approve a written request from firms in this position. We do believe it 
is necessary for recipients to verify that disadvantaged owners can 
control work in an additional area, and we have added language to this 
effect. Recipients will have discretion about how to administer this 
verification process.
    Commenters asked for additional clarification about the eligibility 
of people who work only part-time in a firm. We have done so by adding 
examples of situations that do not lead to eligibility (part-time 
involvement in a full-time firm and absentee ownership) and a situation 
that may, depending on circumstances, be compatible with eligibility 
(running a part-time firm all the time it is operating). It should be 
noted that this provision does not preclude someone running a full-time 
firm from having outside employment. Outside employment is incompatible 
with eligibility only when it interferes with the individual's ability 
to control the DBE firm on a full-time basis.
    One commenter brought to the Department's attention the situation 
of DBEs who use ``employee leasing companies.'' According to the 
commenter, employee leasing companies fill a number of administrative 
functions for employers, such as payroll, personnel, forwarding of 
taxes to governmental entities, and drug testing. Typically, the 
employees of the underlying firm are transferred to the payroll of the 
employee leasing firm, which in turn leases them back to the underlying 
employer. The underlying employer continues to hire, fire, train, 
assign, direct, control etc. the employees with respect to their on-
the-job duties. While the employee leasing firm sends payments to the 
IRS, Social Security, and state tax authorities on behalf of the 
underlying employer, it is the latter who is remains responsible for 
paying the taxes.
    For practical and legal purposes, the underlying employer retains 
an employer-employee relationship with the leased employees. The 
employee leasing company does not get involved in the operations of the 
underlying employer. In this situation, the use of an employee leasing 
company by a DBE does not preclude the DBE from meeting the control 
requirements of this rule. Nor does the employee leasing company become 
an affiliate of the DBE for business size purposes. Case-by-case 
judgement, of course, remains necessary. Should an employee leasing 
company in fact exercise control over the on-the-job activities of 
employees of the DBE, then the ability of the DBE to meet control 
requirements would be compromised.
    One commenter said, as a general matter, that independence and 
control should be considered separately. We view independence as an 
aspect of control: If a firm is not independent of some other business, 
then the other firm, not the disadvantaged owners, exercise control. 
While independence is an aspect of control that recipients must review, 
we do not see any benefit in separating consideration of the two 
concepts.
    A recent court decision (Jack Wood Construction Co., Inc. v. U.S. 
Department of Transportation, 12 F. Supp. 2d 25 (D.D.C., 1998)) 
overturned a DOT Office of Civil Rights certification appeal decision 
that upheld a denial of certification based on lack of control. The 
court, reading existing part 23 closely, said that a non-disadvantaged 
individual who was an employee, but not an owner, of a firm could 
disproportionately control the affairs of a firm without making it 
ineligible. The court also said that the existing rule language did not 
make it necessary for a disadvantaged owner to have both technical and 
managerial competence to control a firm. Part 26 solves both problems 
that the court found to exist in part 23's control provisions (see 
Sec. 26.71(e)-(g)).

Section 26.73  What Are Other Rules Affecting Certification?

    There were relatively few comments on this section. One commenter 
disagreed with the proposal to continue the provision that a firm owned 
by a DBE firm, rather than by socially and economically disadvantaged 
individuals, was not eligible. The argument against this provision, as 
we understand it, is that precluding a DBE firm from being owned by, 
for example, a holding company that is in turn owned by disadvantaged 
individuals would deny those individuals a financing and tax planning 
tool available to other businesses.
    This argument has merit in some circumstances. The purpose of the 
DBE program is to help create a level playing field for DBEs. It would 
be inconsistent with the program's intent to deny DBEs a financial tool 
that is generally available to other businesses. The Department will 
allow this exception. Recipients must be careful, however, to ensure 
that certifying a firm under this exception does not have the effect of 
allowing the firm, or its parent company, to evade any of the 
requirements or restrictions of the certification process. The 
arrangement must be consistent with local business practices and must 
not have the effect of diluting actual ownership by disadvantaged 
individuals below the 51 percent requirement. All other certification 
requirements, including control by disadvantaged individuals and size 
limits, would continue to apply.
    Another commenter suggested a firm should not be certified as a DBE 
if its owners have interests in non-DBE businesses. We believe that a 
per se rule to this effect would be too draconian. If owners of a DBE--
whether disadvantaged individuals or not--also have interests in other 
businesses, the recipient can look at the relationships among the 
businesses to determine if the DBE is really independent.
    One commenter opposed basing certification on the present status of

[[Page 5121]]

firms, seeking discretion to deny certification based on the history of 
the firm. We believe there is no rational or legal basis for denying 
certification to a firm on the basis of what it was in the past. Is it 
a small business presently owned and controlled by socially and 
economically disadvantaged individuals? If so, it would be contrary to 
the statute, and to the intent of the program, to deny certification 
because at some time--perhaps years--in the past, it was not owned and 
controlled by such individuals. The rule specifies that recipients may 
consider whether a firm has engaged in a pattern of conduct evincing an 
intent to evade or subvert the program.
    The final provision of this section concerns firms owned by Alaska 
Native Corporations (ANCs), Indian tribes, and Native Hawaiian 
Organizations. Like the NPRM, it provides that firms owned by these 
entities can be eligible DBEs, even though their ownership does not 
reside, as such, in disadvantaged individuals. These firms must meet 
the size standards applicable to other firms, including affiliation 
(lest large combinations of tribal or ANC-owned corporations put other 
DBEs at a strong competitive disadvantage). Also, they must be 
controlled by socially and economically disadvantaged individuals. For 
example, if a tribe or ANC owns a company, but its daily business 
operations are controlled by a non-disadvantaged white male, the firm 
would not be eligible.
    Commenters pointed us to the following provision of the Alaska 
Native Claims Settlement Act (ANCSA):

    (e) Minority and economically disadvantaged status--
    (1) For all purposes of Federal law, a Native Corporation shall 
be considered to be a corporation owned and controlled by Natives 
and a minority and economically disadvantaged business enterprise if 
the Settlement Common Stock of the corporation and other stock of 
the corporation held by holders of Settlement Common Stock and by 
Natives and descendants of Natives, represents a majority of both 
the total equity of the corporation and the total voting power of 
the corporation for the purposes of electing directors.
    (2) For all purposes of Federal law, direct and indirect 
subsidiary corporations, joint ventures, and partnerships of a 
Native Corporation qualifying pursuant to paragraph (1) shall be 
considered to be entities owned and controlled by Natives and a 
minority and economically disadvantaged business enterprise if the 
shares of stock or other units of ownership interest in any such 
entity held by such Native Corporation and by the holders of its 
Settlement Common Stock represent a majority of both--
    (A) The total equity of the subsidiary corporation, joint 
venture, or partnership; and
    (B) The total voting power of the subsidiary corporation, joint 
venture, or partnership for the purpose of electing directors, the 
general partner, or principal officers. (43 U.S.C. 1626(e)).

The question for the Department is whether, reading this language 
together with the language of the Department's DBE statutes, DOT must 
alter these provisions.
    The DOT DBE statute (TEA-21 version) provides as follows:

    (b) Disadvantaged Business Enterprises.--
    (1) General rule.--Except to the extent that the Secretary 
determines otherwise, not less than 10 percent of the amounts made 
available for any program under titles I, III, and V of this Act 
shall be expended with small business concerns owned and controlled 
by socially and economically disadvantaged individuals.
    (2) Definitions.--In this subsection, the following definitions 
apply:
    (A) Small business concern.--The term ``small business concern'' 
has the meaning such term has under section 3 of the Small Business 
Act (15 U.S.C. 632); except that such term shall not include any 
concern or group of concerns controlled by the same socially and 
economically disadvantaged individual or individuals which has 
average annual gross receipts over the preceding 3 fiscal years in 
excess of $16,600,000, as adjusted by the Secretary for inflation.
    (B) Socially and economically disadvantaged individuals.--The 
term ``socially and economically disadvantaged individuals'' has the 
meaning such term has under section 8(d) of the Small Business Act 
(15 U.S.C. 637(d)) and relevant subcontracting regulations 
promulgated pursuant thereto; except that women shall be presumed to 
be socially and economically disadvantaged individuals for purposes 
of this subsection.
* * * * *
    (4) Uniform certification.--The Secretary shall establish 
minimum uniform criteria for State governments to use in certifying 
whether a concern qualifies for purposes of this subsection. Such 
minimum uniform criteria shall include but not be limited to on-site 
visits, personal interviews, licenses, analysis of stock ownership, 
listing of equipment, analysis of bonding capacity, listing of work 
completed, resume of principal owners, financial capacity, and type 
of work preferred.

While the language Sec. 1626(e) is broad, the terms used in the two 
statutes are not identical. Section 1626(e) refers to ``minority and 
economically disadvantaged business enterprise[s]'', while the 
Department's statutes refer to ``small business concerns owned and 
controlled by socially and economically disadvantaged individuals.'' 
Requirements applicable to the former need not necessarily apply to the 
latter.
    The legislative history of Sec. 1626(e) lends support to 
distinguishing the two statutes. The following excerpt from House 
Report 102-673 suggests that the intent of Congress in enacting this 
provision was to focus on direct Federal procurement programs:

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

This statute, in other words, was meant to apply to direct Federal 
procurement programs like the 8(a) program or the DOD SBD program, 
rather than a program involving state and local procurements reimbursed 
by DOT financial assistance.
    The TEA-21 program is a more recent, more specific statute 
governing DOT recipients' programs. In contrast, the older, more 
general section 1626(e) evinces no specific intent to govern the DOT 
DBE program. There is no evidence that Congress, in enacting section 
1626(e), had any awareness of or intent to alter the DOT DBE program.
    A number of provisions of the TEA-21 statute suggest that Congress 
intended to impose specific requirements for the DOT program, without 
regard to other more general statutory references. For example, the 
$16.6 million size cap and the uniform certification requirements 
suggest that Congress wanted the eligibility for the DOT program to be 
determined in very specific ways, giving no hint that they intended 
these specific requirements to be overridden in the case of ANCs.
    The Department concludes that section 1626(e) is distinguishable 
from the DOT DBE statutes, and that the latter govern the 
implementation of the DBE program. The Department is not compelled to 
alter its approach to certification in the case of ANCs.

[[Page 5122]]

Section 26.81  What Are the Requirements for Unified Certification 
Programs?

    As was the case following the 1992 NPRM, a significant majority of 
the large number of commenters addressing the issue favored 
implementing the proposed UCP requirement, which the final rule retains 
largely as proposed. A few commenters suggested that airports be 
included in UCPs for concession purposes as well as for FAA-assisted 
contracting, because there are not any significant differences between 
the certification standards for concessionaires and contractors (the 
only exception is size standards, which are easy to apply). We agree, 
and the final rule does not make an exception for concessions 
(regardless of the CFR part in which the concessions provisions 
appear). Some commenters wanted either a longer or shorter 
implementation period than the SNPRM proposed, but we believe the 
proposal is a good middle ground between the goal of establishing UCPs 
as soon as possible and the time recipients will need to resolve 
organizational, operational, and funding issues.
    There were a number of comments and questions about details of the 
UCP provision. One recipient wondered whether a UCP may or must be 
separate from a recipient and what the legal liability implications of 
various arrangements might be. As far as the rule is concerned, a UCP 
can either be situated within a recipient's organization or elsewhere. 
Recipients can take state law concerning liability into account in 
determining how best to structure a UCP in their state. Another 
recipient asked if existing UCPs could be exempted from submitting 
plans for approval. Rather than being exempted, we believe that it 
would be appropriate for such UCPs to submit their existing plans. They 
would have to change them only to the extent needed to conform to the 
requirements of the rule.
    Some commenters asked about the relationship of UCPs to recipients. 
For example, should a recipient be able to certify a firm that the UCP 
had not certified (or whose application the UCP had not yet acted on) 
or refuse to recognize the UCP certification of a firm the recipient 
did not think should be eligible? In both cases, the answer is no. 
Allowing this kind of discretion would fatally undermine the ``one-stop 
shopping'' rationale of UCPs. However, a recipient could, like any 
other party, initiate a third-party challenge to a UCP certification 
action, the result of which could be appealed to DOT.
    We would emphasize that the form of the UCP is a matter for 
negotiation among DOT recipients in a state, and this regulation does 
not prescribe its organization. A number of models are available, 
including single state agencies, consortia of recipients that hire a 
contractor or share the workload among themselves, mandatory 
reciprocity among recipients, etc. It might be conceivable for a UCP to 
be a ``virtual entity'' that is not resident in any particular 
location. What matters is that the UCP meet the functional requirements 
of this rule and actually provide one-stop shopping service to 
applicants. The final rule adds a provision to clarify that UCPs--even 
when not part of a recipient's own organization--must comply with all 
provisions of this rule concerning certification and nondiscrimination. 
Recipients cannot use a UCP that does not do so. For example, if a UCP 
fails to comply with part 26 certification standards and procedures, or 
discriminates against certain applicants, the Secretary reserves the 
right to direct recipients not to use the UCP, effectively 
``decertifying'' the UCP for purposes of DOT-assisted programs. In this 
case, which we hope will never happen, the Department would work with 
recipients in the state on interim measures and replacement of the 
erring UCP.
    The SNPRM proposed ``pre-certification.'' That is, the UCP would 
have to certify a firm before the firm became eligible to participate 
as a DBE in a contract. The application could not be submitted as a 
last-minute request in connection with a procurement action, which 
could lead to hasty and inaccurate certification decisions. Commenters 
were divided on this issue, with most expressing doubts about the 
concept. The Department believes that avoiding last-minute (and 
especially post-bid opening) applications is important to an orderly 
and accurate certification process, so we are retaining this 
requirement. However, we are modifying the timing of the requirement, 
by requiring that certification take place before the bid/offer due 
date, rather than before the issuance of the solicitation. The 
certification action must be completed by this date in order for the 
firm's proposed work on the particular contract to be credited toward 
DBE goals. It is not enough for the application to have been submitted 
by the deadline.
    The SNPRM proposed that, once UCPs were up and running, a UCP in 
State A would not have to process an application from a firm whose 
principal place of business was in State B unless State B had first 
certified the firm. Most commenters supported this proposal, one noting 
that it would help eliminate problems of having to make costly out-of-
state site visits. It would also potentially reduce confusion caused by 
multiple, and potentially conflicting, outcomes in certification 
decisions. One commenter was concerned that this provision would lead 
to ``free-rider'' problems among recipients. The Department will be 
alert to this possibility, but we do not see it as precluding going 
forward with this provision. We have added a provision making explicit 
that when State B has certified a firm, it would have an obligation to 
send copies of the information and documents it had on the firm to 
State A when the firm applied there.
    All save one of the comments on mandatory reciprocity opposed the 
concept. That is, commenters favored UCPs being able to choose whether 
or not to accept certification decisions made by other UCPs. The 
Department urges UCPs to band together in multi-state or regional 
alliances, but we believe that it is best to leave reciprocity 
discretionary. Mandatory reciprocity, even among UCPs, could lead to 
forum shopping problems.
    UCPs will have a common directory, which will have to be maintained 
in electronic form (i.e., on the internet). One commenter suggested 
that this electronic directory be updated daily. We think this comment 
has merit, and the final rule will require recipients to keep a running 
update of the electronic directory, making changes as they occur.

Section 26.83  What Procedures Do Recipients Follow in Making 
Certification Decisions?

    Commenters generally supported this certification process section, 
and we are adopting it with only minor changes. Commenters suggested 
that provision for electronic filing of applications be discretionary 
rather than mandatory. We agree, and the final rule does not mandate 
development of electronic filing systems. Some commenters remained 
concerned about site visits and asked for more guidance on the subject. 
We intend to provide future guidance on this subject.
    Most commenters who addressed the subject favored the development 
of a mandatory, nationwide, standard DOT application form for DBE 
eligibility. A number of commenters supplied the forms they use as 
examples. We believe that this is a good idea, which will help avoid 
confusion among applicants in a nationwide program. However, we have

[[Page 5123]]

not yet developed a form for this purpose. The final rule reserves a 
requirement for recipients to use a uniform form. We intend to work on 
developing such a form during the next year, in consultation with 
recipients and applicants. Meanwhile, recipients can continue to use 
existing forms, modified as necessary to conform to the requirements of 
this part.
    The SNPRM said recipients could charge a reasonable fee to 
applicants. A majority of commenters, both recipients and DBEs, opposed 
the idea of a fee or said it should be capped at a low figure. Fees are 
not mandatory, and they would be limited, under the final rule, to 
modest application fees (not intended to recover the cost of the 
certification process). However, if a recipient wants to charge a 
modest application fee, we do not see that it is inconsistent with the 
nature of the program to allow it to do so. Fee waivers would be 
required if necessary (i.e., a firm who showed they could not afford 
it). All fees would have to be approved by the concerned OA as part of 
the DBE program approval process, which would preclude excessive fees.
    Given that reciprocity is discretionary among recipients, we 
thought it would be useful to spell out the options a recipient has 
when presented by an applicant with the information that another 
recipient has certified the firm. The recipient may accept the other 
recipient's certification without any additional procedures. The 
recipient can make an independent decision based, in whole or in part, 
on the information developed by the first recipient (e.g., application 
forms, supporting documents, reports of site visits). The recipient may 
make the applicant start an entire new application process. The choice 
among these options is up to the recipient. (As noted above, UCPs will 
have these same options.)
    Most commenters on the subject supported the three-year term for 
certifications. Some wanted a shorter or longer period. We believe the 
three-year term is appropriate, particularly given the safeguards of 
annual and update affidavits that the rule provides. In response to a 
few comments that recipients should have longer than the proposed 21 
days after a change in circumstances to submit an update affidavit, we 
have extended the period to 30 days. If recipients want to have a 
longer term in their DBE programs than the three years provided in the 
rule, they can do so, with the Department's approval, as part of their 
DBE programs.
    A few recipients said that the 90-day period for making decisions 
on applications (with the possibility of a 60-day extension) was too 
short. Particularly since this clock does not begin ticking until a 
complete application, including necessary supporting documentation, is 
received from the applicant, we do not think this time frame is 
unreasonable. We would urge recipients and applicants to work together 
to resolve minor errors or data gaps during the assembly of the 
package, before this time period begins to run.

Section 26.85  What Rules Govern Recipients' Denials of Initial 
Requests for Certification?

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

Section 26.87  What Procedures Does a Recipient Use To Remove a DBE's 
Eligibility?

    As long ago as 1983, the Department (in the preamble to the first 
DBE rule) strongly urged recipients to use appropriate due process 
procedures for decertification actions. Recipient procedures are still 
inconsistent and, in some cases, inadequate, in this respect. Quite 
recently, for example, litigation forced one recipient to rescind a 
decertification of an apparently ineligible firm because it had failed 
to provide administrative due process. We believe that proper due 
process procedures are crucial to maintaining the integrity of this 
program. The majority of commenters agreed, though a number of 
commenters had concerns about particular provisions of the SNPRM 
proposal.
    Some recipients, for example, thought separation of functions was 
an unnecessary requirement, or too burdensome, particularly for small 
recipients. We believe separation of functions is essential: there 
cannot be a fair proceeding if the same party acts as prosecutor and 
judge. We believe that the burdens are modest, particularly in the 
context of state DOTs and statewide UCPs. We acknowledge that for small 
recipients, like small airports and transit authorities, small staffs 
may create problems in establishing separation of functions (e.g., if 
there is only one person in the organization who is knowledgeable about 
the DBE program). For this reason, the rule will permit small 
recipients to comply with this requirement to the extent feasible until 
UCPs are in operation (at which time the UCPs would have to ensure 
separation of functions in all such cases). The organizational scheme 
for providing separation of functions will be part of each recipient's 
DBE program. In the case of a small recipient, if the DBE program 
showed that other alternatives (e.g., the airport using the transit 
authority's DBE officer as the decisionmaker in decertification 
actions, and vice-versa) were unavailable, the Department could approve 
something less than ideal separation of functions for the short term 
before the UCP becomes operational. In reviewing certification appeals 
from such recipients, the Department would take into account the 
absence of separation of functions.
    It is very important that the decisionmaker be someone who is 
familiar with the DBE certification requirements of this part. The 
decisionmaker need not be an administrative law judge or some similar 
official; a knowledgeable program official is preferable to an ALJ who 
lacks familiarity with the program.
    Another aspect of the due process requirements that commenters 
addressed was the requirement for a record of the hearing, which some 
commenters found to be burdensome. We want to emphasize that, while 
recipients have to keep a hearing record (including a verbatim record 
of the hearing), they do not need to produce a transcript unless there 
is an appeal. A hearing record is essential, because DOT appellate 
review is a review of the administrative record.
    Some commenters suggested deleting two provisions. One of these 
allowed recipients to impose a sort of administrative temporary 
restraining order on firms pending a final decertification decision. 
The other allowed the effect of a decertification decision to be 
retroactive to the date of the complaint. The Department agrees that 
these two provisions could lead to unfairness, and so we have deleted 
them.

Section 26.89  What Is the Process for Certification Appeals to the 
Department of Transportation?

    Several commenters addressed this section, supporting it with a few 
requests for modification. Some

[[Page 5124]]

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

Section 26.91  What Actions Do Recipients Take Following DOT 
Certification Appeal Decisions?

    There were few comments concerning this section. Some comments 
suggested DOT appeal decisions should have mandatory nationwide effect. 
That is if DOT upheld the decertification action of Recipient A, 
Recipients B, C, D, E, etc. should automatically decertify the firm. 
This approach is inconsistent with the administrative review of the 
record approach this rule takes for appeals to DOT.
    A DOT decision that A's decertification was supported by 
substantial evidence is not a DOT decision that the firm is ineligible. 
It is only a finding that A had enough evidence to decertify the firm. 
Other results might also be supported by substantial evidence. 
Nevertheless, when the Department takes action on an appeal, other 
recipients would be well advised to review their own decisions to see 
if any new proceedings are appropriate. One comment suggested the 
Department should explain a refusal to accept a complaint. This is 
already the Department's practice.
    The SNPRM included a proposal to permit direct third-party 
complaints to the Department. There were few comments on this proposal, 
which would have continued an existing DOT practice. Some of these 
comments suggested dropping this provision, saying it made more sense 
to have all certification matters handled at the recipient level in the 
first instance. Others raised procedural issues (e.g., the possibility 
of the Department holding de novo hearings). The Department has 
reconsidered this proposal, and we have decided to delete it. We 
believe it will avoid administrative confusion and simplify procedures 
for everyone if all certification actions begin at the recipient level, 
with DOT appellate review on the administrative record.

Subpart F--Compliance and Enforcement

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

DBE Participation in Airport Concessions

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

Regulatory Analyses and Notices

Executive Order 12866

    This rule is a significant rule under Executive Order 12866, 
because of the substantial public interest concerning and policy 
importance of programs to ensure nondiscrimination in Federally-
assisted contracting. It also affects a wide variety of parties, 
including recipients in three important DOT financial assistance 
programs and the DBE and non-DBE contractors that work for them. It has 
been reviewed by the Office of Management and Budget. It is also a 
significant rule for purposes of the Department's Regulatory Policies 
and Procedures.
    We do not believe that the rule will have significant economic 
impacts, however. In evaluating the potential economic impact of this 
rule, we begin by noting that it does not create a new program. It 
simply revises the rule governing an existing program. The economic 
impacts of the DBE program are created by the existing regulation and 
the statutes that mandate it, not by these revisions. The changes that 
we propose in this program are likely to have some positive economic 
impacts. For example, ``one-stop shopping'' and clearer standards in 
certification are likely to reduce costs for small businesses applying 
for DBE certification, as well as reducing administrative burdens on 
recipients.
    The rule's ``narrow tailoring'' changes are likely to be neutral in 
terms of their overall economic impact. These could have some 
distributive impacts (e.g., if the proposed goal-setting mechanism 
results in changes in DBE goals, a different mix of firms may work on 
recipients' contracts), but there would probably not be net gains or 
losses to the economy. There could be some short-term costs to 
recipients owing to changes in program administration resulting from 
``narrow tailoring,'' however.
    In any event, the economic impacts are quite speculative and appear 
nearly impossible to quantify. Comments did not provide, and the 
Department does not have, any significant information that would allow 
the Department to estimate any such impacts.

Regulatory Flexibility Act Analysis

    The DBE program is aimed at improving contracting opportunities for 
small businesses owned and controlled by socially and economically 
disadvantaged individuals. Virtually all the businesses it affects are 
small entities. There is no doubt that a DBE rule always affects a 
substantial number of small entities.
    This rule, while improving program administration and facilitating 
DBE participation (e.g., by making the certification process clearer) 
and responding to legal developments, appears essentially cost-neutral 
with respect to small entities in general (as noted above, the one-stop 
shopping feature is intended to benefit small entities seeking to 
participate). It does

[[Page 5125]]

not impose new burdens or costs on small entities, compared to the 
existing rule. It does not affect the total funds or business 
opportunities available to small businesses that seek to work in DOT 
financial assistance programs. To the extent that the proposals in this 
rule (e.g., with respect to changes in the methods used to set overall 
goals) lead to different goals than the existing rule, some small firms 
may gain, and others lose, business.
    There is no data of which the Department is aware that would permit 
us, at this time, to measure the distributive effects of the revisions 
on various types of small entities. It is likely that any attempt to 
gauge these effects would be highly speculative. For this reason, we 
are not able to make a quantitative, or even a precise qualitative, 
estimate of these effects.

Paperwork Reduction Act

    A number of provisions of this rule involve information collection 
requirements subject to the Paperwork Reduction Act of 1995 (PRA). One 
of these provisions, concerning a report of DBE achievements that 
recipients make to the Department, is the subject of an existing OMB 
approval under the PRA.
    With one exception, the other information collection requirements 
of the rule continue existing part 23 requirements, major elements of 
the DBE program that recipients and contractors have been implementing 
since 1980 or 1983. While the final rule modifies these requirements in 
some ways, the Department believes the overall burden of these 
requirements will remain the same or shrink. These requirements are the 
following:
     Firms applying for DBE certification must provide 
information to recipients to allow them to make eligibility decisions. 
Currently certified firms must provide information to recipients to 
allow them to review the firms' continuing eligibility. (After the UCP 
requirements of the rule are implemented, the burdens of the 
certification provisions should be substantially reduced.)
     When contractors bid on prime contracts that have contract 
goals, they must document their DBE participation and/or the good faith 
efforts they have made to meet the contract goals. (Given the final 
rule's emphasis on race-neutral measures, it is likely the burden in 
this area will be reduced.)
     Recipients must maintain a directory of certified DBE 
firms. (Once UCPs are implemented, there will be 52 consolidated 
directories rather than the hundreds now required, reducing burdens 
substantially.)
     Recipients must calculate overall goals and transmit them 
to the Department for approval. (The process of setting overall goals 
is more flexible, but may also be more complex, than under part 23. As 
they make their transition to the final rule's goal-setting process 
during the first years of implementation, recipients may temporarily 
expend more hours than in the past on information-related tasks.)
     Recipients must have a DBE program approved by the 
Department. (The final rule includes a one-time requirement to submit a 
revised program document making changes to conform to the new 
regulation.)

The Department estimates that these program elements will result in a 
total of approximately 1.58 million burden hours to recipients and 
contractors combined during the first year of implementation and 
approximately 1.47 million annual burden hours thereafter.
    The final rule also includes one new information collection 
element. It calls for recipients to collect and maintain data 
concerning both DBE and non-DBE bidders on DOT-assisted contracts. This 
information is intended to assist recipients in making more precise 
determinations of the availability of DBEs and the shape of the ``level 
playing field'' the maintenance of which is a major objective of the 
rule. The Department estimates that this requirement will add 254,595 
burden hours in the first year of implementation. This figure is 
projected to decline to 193,261 hours in the second year and to 161,218 
hours in the third and subsequent years.
    Both as the result of comments and what the Department learns as it 
implements the DBE program under part 26, it is possible for the 
Department's information needs and the way we meet them to change. 
Sometimes the way we collect information can be changed informally 
(e.g., by guidance telling recipients they need not repeat information 
that does not change significantly from year to year). In other 
circumstances, a technical amendment to the regulation may be needed. 
In any case, the Department will remain sensitive to situations in 
which modifying information collection requirements becomes 
appropriate.
    As required by the PRA, the Department has submitted an information 
collection approval request to OMB. Organizations and individuals 
desiring to submit comments on information collection requirements 
should direct them to the Department's docket for this rulemaking. You 
may also submit copies of your comments to the Office of Information 
and Regulatory Affairs (OIRA), OMB, Room 10235, New Executive Office 
Building, Washington, DC, 20503; Attention: Desk Officer for U.S. 
Department of Transportation.
    The Department considers comments by the public on information 
collections for several purposes:
     Evaluating the necessity of information collections for 
the proper performance of the Department's functions, including whether 
the information has practical utility.
     Evaluating the accuracy of the Department's estimate of 
the burden of the information collections, including the validity of 
the methods and assumptions used.
     Enhancing the quality, usefulness, and clarity of the 
information to be collected.
     Minimizing the burden of the collection of information on 
respondents, including through the use of electronic and other methods.

The Department points out that, with the exception of the bid data 
collection, all the information collection elements discussed in this 
section of the preamble have not only been part of the Department's DBE 
program for many years, but have also been the subject of extensive 
public comment following the 1992 NPRM and 1997 SNPRM. Among the over 
900 comments received in response to these notices were a number 
addressing administrative burden issues surrounding these program 
elements. In this final rule, the Department has responded to these 
comments.
    OMB is required to make a decision concerning information 
collections within 30-60 days of the publication of this notice. 
Therefore, for best effect, comments should be received by DOT/OMB 
within 30 days of publication. Following receipt of OMB approval, the 
Department will publish a Federal Register notice containing the 
applicable OMB approval numbers.

Federalism

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

List of Subjects

49 CFR Part 23

    Administrative practice and procedure, Airports, Civil rights,

[[Page 5126]]

Concessions, Government contracts, Grant programs--transportation, 
Minority businesses, Reporting and recordkeeping requirements.

49 CFR Part 26

    Administrative practice and procedure, Airports, Civil rights, 
Government contracts, Grant programs--transportation, Highways and 
roads, Mass transportation, Minority businesses, Reporting and 
recordkeeping requirements.

    Issued this 8th day of January, 1999, at Washington, DC.
Rodney E. Slater,
Secretary of Transportation.

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

PART 23--PARTICIPATION BY DISADVANTAGED BUSINESS ENTERPRISE IN 
AIRPORT CONCESSIONS

    1. Revise the heading of 49 CFR part 23 as set forth above.
    2. Revise the authority citation for 49 CFR part 23 to read as 
follows:

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

Subparts A, C, D, and E--[Removed and Reserved]

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


Sec. 23.89  [Amended]

    4. Amend Sec. 23.89 as follows:
    a. In the definition of ``disadvantaged business,'' remove the 
words ``Sec. 23.61 of subpart D of this part'' and add the words ``49 
CFR part 26''; and remove the words ``Sec. 23.61'' in the last line of 
the definition and add the words ``49 CFR part 26''.
    b. In the definition of ``small business concern,'' paragraph (b), 
remove the words ``Sec. 23.43(d)'' and add the words ``Sec. 23.43(d) in 
effect prior to March 4, 1999 (See 49 CFR Parts 1 to 99 revised as of 
October 1, 1998.)''.
    c. In the definition of ``socially and economically disadvantaged 
individuals,'' remove the words ``Sec. 23.61 of subpart D of this 
part'' and add ``49 CFR part 26''.


Sec. 23.93  [Amended]

    5. Amend Sec. 23.93(a) introductory text by removing the words 
``Sec. 23.7'' and adding the words ``Sec. 26.7''.


Sec. 23.95  [Amended]

    6. Amend Sec. 23.95(a)(1) by removing the words ``based on the 
factors listed in Sec. 23.45(g)(5)'' and adding the words ``consistent 
with the process for setting overall goals set forth in 49 CFR 26.45''.
    7. In addition, amend Sec. 23.95 as follows:
    a. In paragraph (f)(1), remove the words ``Sec. 23.51'' and add the 
words ``49 CFR part 26, subpart E'';
    b. In paragraph (f)(2), remove the words ``Except as provided in 
Sec. 23.51(c), each'' and add ``Each'';
    c. Remove paragraph (f)(5);
    d. In paragraph (g)(1), remove the words ``Sec. 23.53'' and add the 
words ``49 CFR part 26, subpart D''.


Sec. 23.97  [Amended]

    8. Amend Sec. 23.97 by removing the words ``Sec. 23.55'' and adding 
the words ``49 CFR 26.89''.


Sec. 23.11  [Removed]

    9. Remove Sec. 23.111.
    10. Add a new 49 CFR part 26, to read as follows:

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

Subpart A--General

Sec.
26.1  What are the objectives of this part?
26.3  To whom does this part apply?
26.5  What do the terms used in this part mean?
26.7  What discriminatory actions are forbidden?
26.9  How does the Department issue guidance and interpretations 
under this part?
26.11  What records do recipients keep and report?
26.13  What assurances must recipients and contractors make?
26.15  How can recipients apply for exemptions or waivers?

Subpart B--Administrative Requirements for DBE Programs for Federally-
Assisted Contracting

26.21  Who must have a DBE program?
26.23  What is the requirement for a policy statement?
26.25  What is the requirement for a liaison officer?
26.27  What efforts must recipients make concerning DBE financial 
institutions?
26.29  What prompt payment mechanisms may recipients have?
26.31  What requirements pertain to the DBE directory?
26.33  What steps must a recipient take to address overconcentration 
of DBEs in certain types of work?
26.35  What role do business development and mentor-protege programs 
have in the DBE program?
26.37  What are a recipient's responsibilities for monitoring the 
performance of other program participants?

Subpart C--Goals, Good Faith Efforts, and Counting

26.41 What is the role of the statutory 10 percent goal in this 
program?
26.43  Can recipients use set-asides or quotas as part of this 
program?
26.45  How do recipients set overall goals?
26.47  Can recipients be penalized for failing to meet overall 
goals?
26.49  How are overall goals established for transit vehicle 
manufacturers?
26.51  What means do recipients use to meet overall goals?
26.53  What are the good faith efforts procedures recipients follow 
in situations where there are contract goals?
26.55  How is DBE participation counted toward goals?

Subpart D--Certification Standards

26.61 How are burdens of proof allocated in the certification 
process?
26.63  What rules govern group membership determinations?
26.65  What rules govern business size determinations?
26.67  What rules govern determinations of social and economic 
disadvantage?
26.69  What rules govern determinations of ownership?
26.71  What rules govern determinations concerning control?
26.73  What are other rules affecting certification?

Subpart E--Certification Procedures

26.81 What are the requirements for Unified Certification Programs?
26.83  What procedures do recipients follow in making certification 
decisions?
26.85  What rules govern recipients' denials of initial requests for 
certification?
26.87  What procedures does a recipient use to remove a DBE's 
eligibility?
26.89  What is the process for certification appeals to the 
Department of Transportation?
26.91  What actions do recipients take following DOT certification 
appeal decisions?

Subpart F--Compliance and Enforcement

26.101 What compliance procedures apply to recipients?
26.103  What enforcement actions apply in FHWA and FTA programs?
26.105  What enforcement actions apply in FAA Programs?
26.107  What enforcement actions apply to firms participating in the 
DBE program?
26.109  What are the rules governing information, confidentiality, 
cooperation, and intimidation or retaliation?
Appendix A to part 26--Guidance Concerning Good Faith Efforts
Appendix B to part 26--Forms [Reserved]
Appendix C to part 26--DBE Business Development Program Guidelines
Appendix D to part 26--Mentor-Protege Program Guidelines
Appendix E to part 26--Individual Determinations of Social and 
Economic
    Disadvantage

    Authority: 23 U.S.C. 324; 42 U.S.C. 2000d et seq.); 49 U.S.C 
1615, 47107, 47113, 47123;

[[Page 5127]]

Sec. 1101(b), Pub. L. 105-178, 112 Stat. 107, 113.

Subpart A--General


Sec. 26.1  What are the objectives of this part?

    This part seeks to achieve several objectives:
    (a) To ensure nondiscrimination in the award and administration of 
DOT-assisted contracts in the Department's highway, transit, and 
airport financial assistance programs;
    (b) To create a level playing field on which DBEs can compete 
fairly for DOT-assisted contracts;
    (c) To ensure that the Department's DBE program is narrowly 
tailored in accordance with applicable law;
    (d) To ensure that only firms that fully meet this part's 
eligibility standards are permitted to participate as DBEs;
    (e) To help remove barriers to the participation of DBEs in DOT-
assisted contracts;
    (f) To assist the development of firms that can compete 
successfully in the marketplace outside the DBE program; and
    (g) To provide appropriate flexibility to recipients of Federal 
financial assistance in establishing and providing opportunities for 
DBEs.


Sec. 26.3  To whom does this part apply?

    (a) If you are a recipient of any of the following types of funds, 
this part applies to you:
    (1) Federal-aid highway funds authorized under Titles I (other than 
Part B) and V of the Intermodal Surface Transportation Efficiency Act 
of 1991 (ISTEA), Pub. L. 102-240, 105 Stat. 1914, or Titles I, III, and 
V of the Transportation Equity Act for the 21st Century (TEA-21), Pub. 
L. 105-178, 112 Stat. 107.
    (2) Federal transit funds authorized by Titles I, III, V and VI of 
ISTEA, Pub. L. 102-240 or by Federal transit laws in Title 49, U.S. 
Code, or Titles I, III, and V of the TEA-21, Pub. L. 105-178.
    (3) Airport funds authorized by 49 U.S.C. 47101, et seq.
    (b) [Reserved]
    (c) If you are letting a contract, and that contract is to be 
performed entirely outside the United States, its territories and 
possessions, Puerto Rico, Guam, or the Northern Marianas Islands, this 
part does not apply to the contract.
    (d) If you are letting a contract in which DOT financial assistance 
does not participate, this part does not apply to the contract.


26.5  What do the terms used in this part mean?

    Affiliation has the same meaning the term has in the Small Business 
Administration (SBA) regulations, 13 CFR part 121.
    (1) Except as otherwise provided in 13 CFR part 121, concerns are 
affiliates of each other when, either directly or indirectly:
    (i) One concern controls or has the power to control the other; or
    (ii) A third party or parties controls or has the power to control 
both; or
    (iii) An identity of interest between or among parties exists such 
that affiliation may be found.
    (2) In determining whether affiliation exists, it is necessary to 
consider all appropriate factors, including common ownership, common 
management, and contractual relationships. Affiliates must be 
considered together in determining whether a concern meets small 
business size criteria and the statutory cap on the participation of 
firms in the DBE program.
    Alaska Native means a citizen of the United States who is a person 
of one-fourth degree or more Alaskan Indian (including Tsimshian 
Indians not enrolled in the Metlaktla Indian Community), Eskimo, or 
Aleut blood, or a combination of those bloodlines. The term includes, 
in the absence of proof of a minimum blood quantum, any citizen whom a 
Native village or Native group regards as an Alaska Native if their 
father or mother is regarded as an Alaska Native.
    Alaska Native Corporation (ANC) means any Regional Corporation, 
Village Corporation, Urban Corporation, or Group Corporation organized 
under the laws of the State of Alaska in accordance with the Alaska 
Native Claims Settlement Act, as amended (43 U.S.C. 1601, et seq.).
    Compliance means that a recipient has correctly implemented the 
requirements of this part.
    Contract means a legally binding relationship obligating a seller 
to furnish supplies or services (including, but not limited to, 
construction and professional services) and the buyer to pay for them.
    Contractor means one who participates, through a contract or 
subcontract (at any tier), in a DOT-assisted highway, transit, or 
airport program.
    Department or DOT means the U.S. Department of Transportation, 
including the Office of the Secretary, the Federal Highway 
Administration (FHWA), the Federal Transit Administration (FTA), and 
the Federal Aviation Administration (FAA).
    Disadvantaged business enterprise or DBE means a for-profit small 
business concern--
    (1) That is at least 51 percent owned by one or more individuals 
who are both socially and economically disadvantaged or, in the case of 
a corporation, in which 51 percent of the stock is owned by one or more 
such individuals; and
    (2) Whose management and daily business operations are controlled 
by one or more of the socially and economically disadvantaged 
individuals who own it.
    DOT-assisted contract means any contract between a recipient and a 
contractor (at any tier) funded in whole or in part with DOT financial 
assistance, including letters of credit or loan guarantees, except a 
contract solely for the purchase of land.
    Good faith efforts means efforts to achieve a DBE goal or other 
requirement of this part which, by their scope, intensity, and 
appropriateness to the objective, can reasonably be expected to fulfill 
the program requirement.
    Immediate family member means father, mother, husband, wife, son, 
daughter, brother, sister, grandmother, grandfather, grandson, 
granddaughter, mother-in-law, or father-in-law.
    Indian tribe means any Indian tribe, band, nation, or other 
organized group or community of Indians, including any ANC, which is 
recognized as eligible for the special programs and services provided 
by the United States to Indians because of their status as Indians, or 
is recognized as such by the State in which the tribe, band, nation, 
group, or community resides. See definition of ``tribally-owned 
concern'' in this section.
    Joint venture means an association of a DBE firm and one or more 
other firms to carry out a single, for-profit business enterprise, for 
which the parties combine their property, capital, efforts, skills and 
knowledge, and in which the DBE is responsible for a distinct, clearly 
defined portion of the work of the contract and whose share in the 
capital contribution, control, management, risks, and profits of the 
joint venture are commensurate with its ownership interest.
    Native Hawaiian means any individual whose ancestors were natives, 
prior to 1778, of the area which now comprises the State of Hawaii.
    Native Hawaiian Organization means any community service 
organization serving Native Hawaiians in the State of Hawaii which is a 
not-for-profit organization chartered by the State of Hawaii, is 
controlled by Native Hawaiians, and whose business activities will 
principally benefit such Native Hawaiians.

[[Page 5128]]

    Noncompliance means that a recipient has not correctly implemented 
the requirements of this part.
    Operating Administration or OA means any of the following parts of 
DOT: the Federal Aviation Administration (FAA), Federal Highway 
Administration (FHWA), and Federal Transit Administration (FTA). The 
``Administrator'' of an operating administration includes his or her 
designees.
    Personal net worth means the net value of the assets of an 
individual remaining after total liabilities are deducted. An 
individual's personal net worth does not include: The individual's 
ownership interest in an applicant or participating DBE firm; or the 
individual's equity in his or her primary place of residence. An 
individual's personal net worth includes only his or her own share of 
assets held jointly or as community property with the individual's 
spouse.
    Primary industry classification means the four digit Standard 
Industrial Classification (SIC) code designation which best describes 
the primary business of a firm. The SIC code designations are described 
in the Standard Industry Classification Manual. As the North American 
Industrial Classification System (NAICS) replaces the SIC system, 
references to SIC codes and the SIC Manual are deemed to refer to the 
NAICS manual and applicable codes. The SIC Manual and the NAICS Manual 
are available through the National Technical Information Service (NTIS) 
of the U.S. Department of Commerce (Springfield, VA, 22261). NTIS also 
makes materials available through its web site (www.ntis.gov/naics).
    Primary recipient means a recipient which receives DOT financial 
assistance and passes some or all of it on to another recipient.
    Principal place of business means the business location where the 
individuals who manage the firm's day-to-day operations spend most 
working hours and where top management's business records are kept. If 
the offices from which management is directed and where business 
records are kept are in different locations, the recipient will 
determine the principal place of business for DBE program purposes.
    Program means any undertaking on a recipient's part to use DOT 
financial assistance, authorized by the laws to which this part 
applies.
    Race-conscious measure or program is one that is focused 
specifically on assisting only DBEs, including women-owned DBEs.
    Race-neutral measure or program is one that is, or can be, used to 
assist all small businesses. For the purposes of this part, race-
neutral includes gender-neutrality.
    Recipient is any entity, public or private, to which DOT financial 
assistance is extended, whether directly or through another recipient, 
through the programs of the FAA, FHWA, or FTA, or who has applied for 
such assistance.
    Secretary means the Secretary of Transportation or his/her 
designee.
    Set-aside means a contracting practice restricting eligibility for 
the competitive award of a contract solely to DBE firms.
    Small Business Administration or SBA means the United States Small 
Business Administration.
    Small business concern means, with respect to firms seeking to 
participate as DBEs in DOT-assisted contracts, a small business concern 
as defined pursuant to section 3 of the Small Business Act and Small 
Business Administration regulations implementing it (13 CFR part 121) 
that also does not exceed the cap on average annual gross receipts 
specified in Sec. 26.65(b).
    Socially and economically disadvantaged individual means any 
individual who is a citizen (or lawfully admitted permanent resident) 
of the United States and who is--
    (1) Any individual who a recipient finds to be a socially and 
economically disadvantaged individual on a case-by-case basis.
    (2) Any individual in the following groups, members of which are 
rebuttably presumed to be socially and economically disadvantaged:
    (i) ``Black Americans,'' which includes persons having origins in 
any of the Black racial groups of Africa;
    (ii) ``Hispanic Americans,'' which includes persons of Mexican, 
Puerto Rican, Cuban, Dominican, Central or South American, or other 
Spanish or Portuguese culture or origin, regardless of race;
    (iii) ``Native Americans,'' which includes persons who are American 
Indians, Eskimos, Aleuts, or Native Hawaiians;
    (iv) ``Asian-Pacific Americans,'' which includes persons whose 
origins are from Japan, China, Taiwan, Korea, Burma (Myanmar), Vietnam, 
Laos, Cambodia (Kampuchea), Thailand, Malaysia, Indonesia, the 
Philippines, Brunei, Samoa, Guam, the U.S. Trust Territories of the 
Pacific Islands (Republic of Palau), the Commonwealth of the Northern 
Marianas Islands, Macao, Fiji, Tonga, Kirbati, Juvalu, Nauru, Federated 
States of Micronesia, or Hong Kong;
    (v) ``Subcontinent Asian Americans,'' which includes persons whose 
origins are from India, Pakistan, Bangladesh, Bhutan, the Maldives 
Islands, Nepal or Sri Lanka;
    (vi) Women;
    (vii) Any additional groups whose members are designated as 
socially and economically disadvantaged by the SBA, at such time as the 
SBA designation becomes effective.
    Tribally-owned concern means any concern at least 51 percent owned 
by an Indian tribe as defined in this section.
    You refers to a recipient, unless a statement in the text of this 
part or the context requires otherwise (i.e., `You must do XYZ' means 
that recipients must do XYZ).


Sec. 26.7  What discriminatory actions are forbidden?

    (a) You must never exclude any person from participation in, deny 
any person the benefits of, or otherwise discriminate against anyone in 
connection with the award and performance of any contract covered by 
this part on the basis of race, color, sex, or national origin.
    (b) In administering your DBE program, you must not, directly or 
through contractual or other arrangements, use criteria or methods of 
administration that have the effect of defeating or substantially 
impairing accomplishment of the objectives of the program with respect 
to individuals of a particular race, color, sex, or national origin.


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

    (a) This part applies instead of subparts A and C through E of 49 
CFR part 23 in effect prior to March 4, 1999. (See 49 CFR Parts 1 to 
99, revised as of October 1, 1998.) Only guidance and interpretations 
(including interpretations set forth in certification appeal decisions) 
consistent with this part 26 and issued after March 4, 1999 have 
definitive, binding effect in implementing the provisions of this part 
and constitute the official position of the Department of 
Transportation.
    (b) The Secretary of Transportation, Office of the Secretary of 
Transportation, FHWA, FTA, and FAA may issue written interpretations of 
or written guidance concerning this part. Written interpretations and 
guidance are valid and binding, and constitute the official position of 
the Department of Transportation, only if they are issued over the 
signature of the Secretary of Transportation or if they contain the 
following statement:


[[Page 5129]]


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


Sec. 26.11  What records do recipients keep and report?

    (a) [Reserved]
    (b) You must continue to provide data about your DBE program to the 
Department as directed by DOT operating administrations.
    (c) You must create and maintain a bidders list, consisting of all 
firms bidding on prime contracts and bidding or quoting subcontracts on 
DOT-assisted projects. For every firm, the following information must 
be included:
    (1) Firm name;
    (2) Firm address;
    (3) Firm's status as a DBE or non-DBE;
    (4) The age of the firm; and
    (5) The annual gross receipts of the firm.


Sec. Section 26.13  What assurances must recipients and contractors 
make?

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

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

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

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


Sec. 26.15  How can recipients apply for exemptions or waivers?

    (a) You can apply for an exemption from any provision of this part. 
To apply, you must request the exemption in writing from the Office of 
the Secretary of Transportation, FHWA, FTA, or FAA. The Secretary will 
grant the request only if it documents special or exceptional 
circumstances, not likely to be generally applicable, and not 
contemplated in connection with the rulemaking that established this 
part, that make your compliance with a specific provision of this part 
impractical. You must agree to take any steps that the Department 
specifies to comply with the intent of the provision from which an 
exemption is granted. The Secretary will issue a written response to 
all exemption requests.
    (b) You can apply for a waiver of any provision of Subpart B or C 
of this part including, but not limited to, any provisions regarding 
administrative requirements, overall goals, contract goals or good 
faith efforts. Program waivers are for the purpose of authorizing you 
to operate a DBE program that achieves the objectives of this part by 
means that may differ from one or more of the requirements of Subpart B 
or C of this part. To receive a program waiver, you must follow these 
procedures:
    (1) You must apply through the concerned operating administration. 
The application must include a specific program proposal and address 
how you will meet the criteria of paragraph (b)(2) of this section. 
Before submitting your application, you must have had public 
participation in developing your proposal, including consultation with 
the DBE community and at least one public hearing. Your application 
must include a summary of the public participation process and the 
information gathered through it.
    (2) Your application must show that--
    (i) There is a reasonable basis to conclude that you could achieve 
a level of DBE participation consistent with the objectives of this 
part using different or innovative means other than those that are 
provided in subpart B or C of this part;
    (ii) Conditions in your jurisdiction are appropriate for 
implementing the proposal;
    (iii) Your proposal would prevent discrimination against any 
individual or group in access to contracting opportunities or other 
benefits of the program; and
    (iv) Your proposal is consistent with applicable law and program 
requirements of the concerned operating administration's financial 
assistance program.
    (3) The Secretary has the authority to approve your application. If 
the Secretary grants your application, you may administer your DBE 
program as provided in your proposal, subject to the following 
conditions:
    (i) DBE eligibility is determined as provided in subparts D and E 
of this part, and DBE participation is counted as provided in 
Sec. 26.49;
    (ii) Your level of DBE participation continues to be consistent 
with the objectives of this part;
    (iii) There is a reasonable limitation on the duration of your 
modified program; and
    (iv) Any other conditions the Secretary makes on the grant of the 
waiver.
    (4) The Secretary may end a program waiver at any time and require 
you to comply with this part's provisions. The Secretary may also 
extend the waiver, if he or she determines that all requirements of 
paragraphs (b)(2) and (3) of this section continue to be met. Any such 
extension shall be for no longer than period originally set for the 
duration of the program.

Subpart B--Administrative Requirements for DBE Programs for 
Federally-Assisted Contracting


Sec. 26.21  Who must have a DBE program?

    (a) If you are in one of these categories and let DOT-assisted 
contracts, you must have a DBE program meeting the requirements of this 
part:
    (1) All FHWA recipients receiving funds authorized by a statute to 
which this part applies;
    (2) FTA recipients that receive $250,000 or more in FTA planning, 
capital, and/or operating assistance in a Federal fiscal year;
    (3) FAA recipients that receive a grant of $250,000 or more for 
airport planning or development.
    (b)(1) You must submit a DBE program conforming to this part by 
August 31, 1999 to the concerned operating administration (OA). Once 
the OA has approved your program, the approval counts for all of your 
DOT-assisted programs (except that goals are reviewed and approved by 
the particular operating administration that provides funding for your 
DOT-assisted contracts).
    (2) You do not have to submit regular updates of your DBE programs, 
as long as you remain in compliance. However, you must submit 
significant changes in the program for approval.
    (c) You are not eligible to receive DOT financial assistance unless 
DOT has

[[Page 5130]]

approved your DBE program and you are in compliance with it and this 
part. You must continue to carry out your program until all funds from 
DOT financial assistance have been expended.


Sec. 26.23  What is the requirement for a policy statement?

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


Sec. 26.25  What is the requirement for a liaison officer?

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


26.27  What efforts must recipients make concerning DBE financial 
institutions?

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


Sec. 26.29  What prompt payment mechanisms must recipients have?

    (a) You must establish, as part of your DBE program, a contract 
clause to require prime contractors to pay subcontractors for 
satisfactory performance of their contracts no later than a specific 
number of days from receipt of each payment you make to the prime 
contractor. This clause must also require the prompt return of 
retainage payments from the prime contractor to the subcontractor 
within a specific number of days after the subcontractor's work is 
satisfactorily completed.
    (1) This clause may provide for appropriate penalties for failure 
to comply, the terms and conditions of which you set.
    (2) This clause may also provide that any delay or postponement of 
payment among the parties may take place only for good cause, with your 
prior written approval.
    (b) You may also establish, as part of your DBE program, any of the 
following additional mechanisms to ensure prompt payment:
    (1) A contract clause that requires prime contractors to include in 
their subcontracts language providing that prime contractors and 
subcontractors will use appropriate alternative dispute resolution 
mechanisms to resolve payment disputes. You may specify the nature of 
such mechanisms.
    (2) A contract clause providing that the prime contractor will not 
be reimbursed for work performed by subcontractors unless and until the 
prime contractor ensures that the subcontractors are promptly paid for 
the work they have performed.
    (3) Other mechanisms, consistent with this part and applicable 
state and local law, to ensure that DBEs and other contractors are 
fully and promptly paid.


Sec. 26.31  What requirements pertain to the DBE directory?

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


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

    (a) If you determine that DBE firms are so overconcentrated in a 
certain type of work as to unduly burden the opportunity of non-DBE 
firms to participate in this type of work, you must devise appropriate 
measures to address this overconcentration.
    (b) These measures may include the use of incentives, technical 
assistance, business development programs, mentor-protege programs, and 
other appropriate measures designed to assist DBEs in performing work 
outside of the specific field in which you have determined that non-
DBEs are unduly burdened. You may also consider varying your use of 
contract goals, to the extent consistent with Sec. 26.51, to unsure 
that non-DBEs are not unfairly prevented from competing for 
subcontracts.
    (c) You must obtain the approval of the concerned DOT operating 
administration for your determination of overconcentration and the 
measures you devise to address it. Once approved, the measures become 
part of your DBE program.


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

    (a) You may or, if an operating administration directs you to, you 
must establish a DBE business development program (BDP) to assist firms 
in gaining the ability to compete successfully in the marketplace 
outside the DBE program. You may require a DBE firm, as a condition of 
receiving assistance through the BDP, to agree to terminate its 
participation in the DBE program after a certain time has passed or 
certain objectives have been reached. See Appendix C of this part for 
guidance on administering BDP programs.
    (b) As part of a BDP or separately, you may establish a ``mentor-
protege'' program, in which another DBE or non-DBE firm is the 
principal source of business development assistance to a DBE firm.
    (1) Only firms you have certified as DBEs before they are proposed 
for participation in a mentor-protege program are eligible to 
participate in the mentor-protege program.
    (2) During the course of the mentor-protege relationship, you must:
    (i) Not award DBE credit to a non-DBE mentor firm for using its own 
protege firm for more than one half of its goal on any contract let by 
the recipient; and
    (ii) Not award DBE credit to a non-DBE mentor firm for using its 
own protege firm for more than every other contract performed by the 
protege firm.
    (3) For purposes of making determinations of business size under 
this part, you must not treat protege firms as affiliates of mentor 
firms, when both firms are participating under an approved mentor-
protege program. See Appendix D of this part for guidance concerning 
the operation of mentor-protege programs.
    (c) Your BDPs and mentor-protege programs must be approved by the 
concerned operating administration before you implement them. Once 
approved, they become part of your DBE program.


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

    (a) You must implement appropriate mechanisms to ensure compliance 
with the part's requirements by all program participants (e.g., 
applying legal and contract remedies available under Federal, state and 
local law). You must set forth these mechanisms in your DBE program.
    (b) Your DBE program must also include a monitoring and enforcement 
mechanism to verify that the work committed to DBEs at contract award 
is

[[Page 5131]]

actually performed by the DBEs. This mechanism must provide for a 
running tally of actual DBE attainments (e.g., payments actually made 
to DBE firms) and include a provision ensuring that DBE participation 
is credited toward overall or contract goals only when payments are 
actually made to DBE firms.

Subpart C--Goals, Good Faith Efforts, and Counting


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

    (a) The statutes authorizing this program provide that, except to 
the extent the Secretary determines otherwise, not less than 10 percent 
of the authorized funds are to be expended with DBEs.
    (b) This 10 percent goal is an aspirational goal at the national 
level, which the Department uses as a tool in evaluating and monitoring 
DBEs' opportunities to participate in DOT-assisted contracts.
    (c) The national 10 percent goal does not authorize or require 
recipients to set overall or contract goals at the 10 percent level, or 
any other particular level, or to take any special administrative steps 
if their goals are above or below 10 percent.


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

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


Sec. 26.45  How do recipients set overall goals?

    (a) You must set an overall goal for DBE participation in your DOT-
assisted contracts.
    (b) Your overall goal must be based on demonstrable evidence of the 
availability of ready, willing and able DBEs relative to all businesses 
ready, willing and able to participate on your DOT-assisted contracts 
(hereafter, the ``relative availability of DBEs''). The goal must 
reflect your determination of the level of DBE participation you would 
expect absent the effects of discrimination. You cannot simply rely on 
either the 10 percent national goal, your previous overall goal or past 
DBE participation rates in your program without reference to the 
relative availability of DBEs in your market.
    (c) Step 1. You must begin your goal setting process by determining 
a base figure for the relative availability of DBEs. The following are 
examples of approaches that you may take toward determining a base 
figure. These examples are provided as a starting point for your goal 
setting process. Any percentage figure derived from one of these 
examples should be considered a basis from which you begin when 
examining all evidence available in your jurisdiction. These examples 
are not intended as an exhaustive list. Other methods or combinations 
of methods to determine a base figure may be used, subject to approval 
by the concerned operating administration.
    (1) Use DBE Directories and Census Bureau Data. Determine the 
number of ready, willing and able DBEs in your market from your DBE 
directory. Using the Census Bureau's County Business Pattern (CBP) data 
base, determine the number of all ready, willing and able businesses 
available in your market that perform work in the same SIC codes. 
(Information about the CBP data base may be obtained from the Census 
Bureau at their web site, www.census.gov/epcd/cbp/view/cbpview.html.) 
Divide the number of DBEs by the number of all businesses to derive a 
base figure for the relative availability of DBEs in your market.
    (2) Use a bidders list. Determine the number of DBEs that have bid 
or quoted on your DOT-assisted prime contracts or subcontracts in the 
previous year. Determine the number of all businesses that have bid or 
quoted on prime or subcontracts in the same time period. Divide the 
number of DBE bidders and quoters by the number for all businesses to 
derive a base figure for the relative availability of DBEs in your 
market.
    (3) Use data from a disparity study. Use a percentage figure 
derived from data in a valid, applicable disparity study.
    (4) Use the goal of another DOT recipient. If another DOT recipient 
in the same, or substantially similar, market has set an overall goal 
in compliance with this rule, you may use that goal as a base figure 
for your goal.
    (5) Alternative methods. Subject to the approval of the DOT 
operating administration, you may use other methods to determine a base 
figure for your overall goal. Any methodology you choose must be based 
on demonstrable evidence of local market conditions and be designed to 
ultimately attain a goal that is rationally related to the relative 
availability of DBEs in your market.
    (d) Step 2. Once you have calculated a base figure, you must 
examine all of the evidence available in your jurisdiction to determine 
what adjustment, if any, is needed to the base figure in order to 
arrive at your overall goal.
    (1) There are many types of evidence that must be considered when 
adjusting the base figure. These include:
    (i) The current capacity of DBEs to perform work in your DOT-
assisted contracting program, as measured by the volume of work DBEs 
have performed in recent years;
    (ii) Evidence from disparity studies conducted anywhere within your 
jurisdiction, to the extent it is not already accounted for in your 
base figure; and
    (iii) If your base figure is the goal of another recipient, you 
must adjust it for differences in your local market and your 
contracting program.
    (2) You may also consider available evidence from related fields 
that affect the opportunities for DBEs to form, grow and compete. These 
include, but are not limited to:
    (i) Statistical disparities in the ability of DBEs to get the 
financing, bonding and insurance required to participate in your 
program;
    (ii) Data on employment, self-employment, education, training and 
union apprenticeship programs, to the extent you can relate it to the 
opportunities for DBEs to perform in your program.
    (3) If you attempt to make an adjustment to your base figure to 
account for the continuing effects of past discrimination (often called 
the ``but for'' factor) or the effects of an ongoing DBE program, the 
adjustment must be based on demonstrable evidence that is logically and 
directly related to the effect for which the adjustment is sought.
    (e) Once you have determined a percentage figure in accordance with 
paragraphs (c) and (d) of this section, you should express your overall 
goal as follows:
    (1) If you are an FHWA recipient, as a percentage of all Federal-
aid highway funds you will expend in FHWA-assisted contracts in the 
forthcoming fiscal year;
    (2) If you are an FTA or FAA recipient, as a percentage of all FTA 
or FAA funds (exclusive of FTA funds to be used for the purchase of 
transit vehicles) that you will expend in FTA or FAA-assisted contracts 
in the forthcoming fiscal year. In appropriate cases, the FTA or FAA 
Administrator may permit you to express your overall goal as a 
percentage of funds for a particular grant or project or group of 
grants and/or projects.

[[Page 5132]]

    (f)(1) If you set overall goals on a fiscal year basis, you must 
submit them to the applicable DOT operating administration for review 
on August 1 of each year, unless the Administrator of the concerned 
operating administration establishes a different submission date.
    (2) If you are an FTA or FAA recipient and set your overall goal on 
a project or grant basis, you must submit the goal for review at a time 
determined by the FTA or FAA Administrator.
    (3) You must include with your overall goal submission a 
description of the methodology you used to establish the goal, 
including your base figure and the evidence with which it was 
calculated, and the adjustments you made to the base figure and the 
evidence relied on for the adjustments. You should also include a 
summary listing of the relevant available evidence in your jurisdiction 
and, where applicable, an explanation of why you did not use that 
evidence to adjust your base figure. You must also include your 
projection of the portions of the overall goal you expect to meet 
through race-neutral and race-conscious measures, respectively (see 
Sec. 26.51(c)).
    (4) You are not required to obtain prior operating administration 
concurrence with the your overall goal. However, if the operating 
administration's review suggests that your overall goal has not been 
correctly calculated, or that your method for calculating goals is 
inadequate, the operating administration may, after consulting with 
you, adjust your overall goal or require that you do so. The adjusted 
overall goal is binding on you.
    (5) If you need additional time to collect data or take other steps 
to develop an approach to setting overall goals, you may request the 
approval of the concerned operating administration for an interim goal 
and/or goal-setting mechanism. Such a mechanism must:
    (i) Reflect the relative availability of DBEs in your local market 
to the maximum extent feasible given the data available to you; and
    (ii) Avoid imposing undue burdens on non-DBEs.
    (g) In establishing an overall goal, you must provide for public 
participation. This public participation must include:
    (1) Consultation with minority, women's and general contractor 
groups, community organizations, and other officials or organizations 
which could be expected to have information concerning the availability 
of disadvantaged and non-disadvantaged businesses, the effects of 
discrimination on opportunities for DBEs, and your efforts to establish 
a level playing field for the participation of DBEs.
    (2) A published notice announcing your proposed overall goal, 
informing the public that the proposed goal and its rationale are 
available for inspection during normal business hours at your principal 
office for 30 days following the date of the notice, and informing the 
public that you and the Department will accept comments on the goals 
for 45 days from the date of the notice. The notice must include 
addresses to which comments may be sent, and you must publish it in 
general circulation media and available minority-focused media and 
trade association publications.
    (h) Your overall goals must provide for participation by all 
certified DBEs and must not be subdivided into group-specific goals.


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

    (a) You cannot be penalized, or treated by the Department as being 
in noncompliance with this rule, because your DBE participation falls 
short of your overall goal, unless you have failed to administer your 
program in good faith.
    (b) If you do not have an approved DBE program or overall goal, or 
if you fail to implement your program in good faith, you are in 
noncompliance with this part.


Sec. 26.49  How are overall goals established for transit vehicle 
manufacturers?

    (a) If you are an FTA recipient, you must require in your DBE 
program that each transit vehicle manufacturer, as a condition of being 
authorized to bid or propose on FTA-assisted transit vehicle 
procurements, certify that it has complied with the requirements of 
this section. You do not include FTA assistance used in transit vehicle 
procurements in the base amount from which your overall goal is 
calculated.
    (b) If you are a transit vehicle manufacturer, you must establish 
and submit for FTA's approval an annual overall percentage goal. In 
setting your overall goal, you should be guided, to the extent 
applicable, by the principles underlying Sec. 26.45. The base from 
which you calculate this goal is the amount of FTA financial assistance 
included in transit vehicle contracts you will perform during the 
fiscal year in question. You must exclude from this base funds 
attributable to work performed outside the United States and its 
territories, possessions, and commonwealths. The requirements and 
procedures of this part with respect to submission and approval of 
overall goals apply to you as they do to recipients.
    (c) As a transit vehicle manufacturer, you may make the 
certification required by this section if you have submitted the goal 
this section requires and FTA has approved it or not disapproved it.
    (d) As a recipient, you may, with FTA approval, establish project-
specific goals for DBE participation in the procurement of transit 
vehicles in lieu of complying through the procedures of this section.
    (e) If you are an FHWA or FAA recipient, you may, with FHWA or FAA 
approval, use the procedures of this section with respect to 
procurements of vehicles or specialized equipment. If you choose to do 
so, then the manufacturers of this equipment must meet the same 
requirements (including goal approval by FHWA or FAA) as transit 
vehicle manufacturers must meet in FTA-assisted procurements.


Sec. 26.51  What means do recipients use to meet overall goals?

    (a) You must meet the maximum feasible portion of your overall goal 
by using race-neutral means of facilitating DBE participation. Race-
neutral DBE participation includes any time a DBE wins a prime contract 
through customary competitive procurement procedures, is awarded a 
subcontract on a prime contract that does not carry a DBE goal, or even 
if there is a DBE goal, wins a subcontract from a prime contractor that 
did not consider its DBE status in making the award (e.g., a prime 
contractor that uses a strict low bid system to award subcontracts).
    (b) Race-neutral means include, but are not limited to, the 
following:
    (1) Arranging solicitations, times for the presentation of bids, 
quantities, specifications, and delivery schedules in ways that 
facilitate DBE, and other small businesses, participation (e.g., 
unbundling large contracts to make them more accessible to small 
businesses, requiring or encouraging prime contractors to subcontract 
portions of work that they might otherwise perform with their own 
forces);
    (2) Providing assistance in overcoming limitations such as 
inability to obtain bonding or financing (e.g., by such means as 
simplifying the bonding process, reducing bonding requirements, 
eliminating the impact of surety costs from bids, and providing 
services to help DBEs, and other small businesses, obtain bonding and 
financing);
    (3) Providing technical assistance and other services;
    (4) Carrying out information and communications programs on 
contracting procedures and specific

[[Page 5133]]

contract opportunities (e.g., ensuring the inclusion of DBEs, and other 
small businesses, on recipient mailing lists for bidders; ensuring the 
dissemination to bidders on prime contracts of lists of potential 
subcontractors; provision of information in languages other than 
English, where appropriate);
    (5) Implementing a supportive services program to develop and 
improve immediate and long-term business management, record keeping, 
and financial and accounting capability for DBEs and other small 
businesses;
    (6) Providing services to help DBEs, and other small businesses, 
improve long-term development, increase opportunities to participate in 
a variety of kinds of work, handle increasingly significant projects, 
and achieve eventual self-sufficiency;
    (7) Establishing a program to assist new, start-up firms, 
particularly in fields in which DBE participation has historically been 
low;
    (8) Ensuring distribution of your DBE directory, through print and 
electronic means, to the widest feasible universe of potential prime 
contractors; and
    (9) Assisting DBEs, and other small businesses, to develop their 
capability to utilize emerging technology and conduct business through 
electronic media.
    (c) Each time you submit your overall goal for review by the 
concerned operating administration, you must also submit your 
projection of the portion of the goal that you expect to meet through 
race-neutral means and your basis for that projection. This projection 
is subject to approval by the concerned operating administration, in 
conjunction with its review of your overall goal.
    (d) You must establish contract goals to meet any portion of your 
overall goal you do not project being able to meet using race-neutral 
means.
    (e) The following provisions apply to the use of contract goals:
    (1) You may use contract goals only on those DOT-assisted contracts 
that have subcontracting possibilities.
    (2) You are not required to set a contract goal on every DOT-
assisted contract. You are not required to set each contract goal at 
the same percentage level as the overall goal. The goal for a specific 
contract may be higher or lower than that percentage level of the 
overall goal, depending on such factors as the type of work involved, 
the location of the work, and the availability of DBEs for the work of 
the particular contract. However, over the period covered by your 
overall goal, you must set contract goals so that they will 
cumulatively result in meeting any portion of your overall goal you do 
not project being able to meet through the use of race-neutral means.
    (3) Operating administration approval of each contract goal is not 
necessarily required. However, operating administrations may review and 
approve or disapprove any contract goal you establish.
    (4) Your contract goals must provide for participation by all 
certified DBEs and must not be subdivided into group-specific goals.
    (f) To ensure that your DBE program continues to be narrowly 
tailored to overcome the effects of discrimination, you must adjust 
your use of contract goals as follows:
    (1) If your approved projection under paragraph (c) of this section 
estimates that you can meet your entire overall goal for a given year 
through race-neutral means, you must implement your program without 
setting contract goals during that year.

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

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

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

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

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

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

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

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


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

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

[[Page 5134]]

offeror does either of the following things:
    (1) Documents that it has obtained enough DBE participation to meet 
the goal; or
    (2) Documents that it made adequate good faith efforts to meet the 
goal, even though it did not succeed in obtaining enough DBE 
participation to do so. If the bidder/offeror does document adequate 
good faith efforts, you must not deny award of the contract on the 
basis that the bidder/offeror failed to meet the goal. See Appendix A 
of this part for guidance in determining the adequacy of a bidder/
offeror's good faith efforts.
    (b) In your solicitations for DOT-assisted contracts for which a 
contract goal has been established, you must require the following:
    (1) Award of the contract will be conditioned on meeting the 
requirements of this section;
    (2) All bidders/offerors will be required to submit the following 
information to the recipient, at the time provided in paragraph (b)(3) 
of this section:
    (i) The names and addresses of DBE firms that will participate in 
the contract;
    (ii) A description of the work that each DBE will perform;
    (iii) The dollar amount of the participation of each DBE firm 
participating;
    (iv) Written documentation of the bidder/offeror's commitment to 
use a DBE subcontractor whose participation it submits to meet a 
contract goal;
    (v) Written confirmation from the DBE that it is participating in 
the contract as provided in the prime contractor's commitment; and
    (vi) If the contract goal is not met, evidence of good faith 
efforts (see Appendix A of this part); and
    (3) At your discretion, the bidder/offeror must present the 
information required by paragraph (b)(2) of this section--
    (i) Under sealed bid procedures, as a matter of responsiveness, or 
with initial proposals, under contract negotiation procedures; or
    (ii) At any time before you commit yourself to the performance of 
the contract by the bidder/offeror, as a matter of responsibility.
    (c) You must make sure all information is complete and accurate and 
adequately documents the bidder/offeror's good faith efforts before 
committing yourself to the performance of the contract by the bidder/
offeror.
    (d) If you determine that the apparent successful bidder/offeror 
has failed to meet the requirements of paragraph (a) of this section, 
you must, before awarding the contract, provide the bidder/offeror an 
opportunity for administrative reconsideration.
    (1) As part of this reconsideration, the bidder/offeror must have 
the opportunity to provide written documentation or argument concerning 
the issue of whether it met the goal or made adequate good faith 
efforts to do so.
    (2) Your decision on reconsideration must be made by an official 
who did not take part in the original determination that the bidder/
offeror failed to meet the goal or make adequate good faith efforts to 
do so.
    (3) The bidder/offeror must have the opportunity to meet in person 
with your reconsideration official to discuss the issue of whether it 
met the goal or made adequate good faith efforts to do so.
    (4) You must send the bidder/offeror a written decision on 
reconsideration, explaining the basis for finding that the bidder did 
or did not meet the goal or make adequate good faith efforts to do so.
    (5) The result of the reconsideration process is not 
administratively appealable to the Department of Transportation.
    (e) In a ``design-build'' or ``turnkey'' contracting situation, in 
which the recipient lets a master contract to a contractor, who in turn 
lets subsequent subcontracts for the work of the project, a recipient 
may establish a goal for the project. The master contractor then 
establishes contract goals, as appropriate, for the subcontracts it 
lets. Recipients must maintain oversight of the master contractor's 
activities to ensure that they are conducted consistent with the 
requirements of this part.
    (f)(1) You must require that a prime contractor not terminate for 
convenience a DBE subcontractor listed in response to paragraph (b)(2) 
of this section (or an approved substitute DBE firm) and then perform 
the work of the terminated subcontract with its own forces or those of 
an affiliate, without your prior written consent.
    (2) When a DBE subcontractor is terminated, or fails to complete 
its work on the contract for any reason, you must require the prime 
contractor to make good faith efforts to find another DBE subcontractor 
to substitute for the original DBE. These good faith efforts shall be 
directed at finding another DBE to perform at least the same amount of 
work under the contract as the DBE that was terminated, to the extent 
needed to meet the contract goal you established for the procurement.
    (3) You must include in each prime contract a provision for 
appropriate administrative remedies that you will invoke if the prime 
contractor fails to comply with the requirements of this section.
    (g) You must apply the requirements of this section to DBE bidders/
offerors for prime contracts. In determining whether a DBE bidder/
offeror for a prime contract has met a contract goal, you count the 
work the DBE has committed to performing with its own forces as well as 
the work that it has committed to be performed by DBE subcontractors 
and DBE suppliers.


Sec. 26.55  How is DBE participation counted toward goals?

    (a) When a DBE participates in a contract, you count only the value 
of the work actually performed by the DBE toward DBE goals.
    (1) Count the entire amount of that portion of a construction 
contract (or other contract not covered by paragraph (a)(2) of this 
section) that is performed by the DBE's own forces. Include the cost of 
supplies and materials obtained by the DBE for the work of the 
contract, including supplies purchased or equipment leased by the DBE 
(except supplies and equipment the DBE subcontractor purchases or 
leases from the prime contractor or its affiliate).
    (2) Count the entire amount of fees or commissions charged by a DBE 
firm for providing a bona fide service, such as professional, 
technical, consultant, or managerial services, or for providing bonds 
or insurance specifically required for the performance of a DOT-
assisted contract, toward DBE goals, provided you determine the fee to 
be reasonable and not excessive as compared with fees customarily 
allowed for similar services.
    (3) When a DBE subcontracts part of the work of its contract to 
another firm, the value of the subcontracted work may be counted toward 
DBE goals only if the DBE's subcontractor is itself a DBE. Work that a 
DBE subcontracts to a non-DBE firm does not count toward DBE goals.
    (b) When a DBE performs as a participant in a joint venture, count 
a portion of the total dollar value of the contract equal to the 
distinct, clearly defined portion of the work of the contract that the 
DBE performs with its own forces toward DBE goals.
    (c) Count expenditures to a DBE contractor toward DBE goals only if 
the DBE is performing a commercially useful function on that contract.
    (1) A DBE performs a commercially useful function when it is 
responsible for execution of the work of the contract and is carrying 
out its responsibilities

[[Page 5135]]

by actually performing, managing, and supervising the work involved. To 
perform a commercially useful function, the DBE must also be 
responsible, with respect to materials and supplies used on the 
contract, for negotiating price, determining quality and quantity, 
ordering the material, and installing (where applicable) and paying for 
the material itself. To determine whether a DBE is performing a 
commercially useful function, you must evaluate the amount of work 
subcontracted, industry practices, whether the amount the firm is to be 
paid under the contract is commensurate with the work it is actually 
performing and the DBE credit claimed for its performance of the work, 
and other relevant factors.
    (2) A DBE does not perform a commercially useful function if its 
role is limited to that of an extra participant in a transaction, 
contract, or project through which funds are passed in order to obtain 
the appearance of DBE participation. In determining whether a DBE is 
such an extra participant, you must examine similar transactions, 
particularly those in which DBEs do not participate.
    (3) If a DBE does not perform or exercise responsibility for at 
least 30 percent of the total cost of its contract with its own work 
force, or the DBE subcontracts a greater portion of the work of a 
contract than would be expected on the basis of normal industry 
practice for the type of work involved, you must presume that it is not 
performing a commercially useful function.
    (4) When a DBE is presumed not to be performing a commercially 
useful function as provided in paragraph (c)(3) of this section, the 
DBE may present evidence to rebut this presumption. You may determine 
that the firm is performing a commercially useful function given the 
type of work involved and normal industry practices.
    (5) Your decisions on commercially useful function matters are 
subject to review by the concerned operating administration, but are 
not administratively appealable to DOT.
    (d) Use the following factors in determining whether a DBE trucking 
company is performing a commercially useful function:
    (1) The DBE must be responsible for the management and supervision 
of the entire trucking operation for which it is responsible on a 
particular contract, and there cannot be a contrived arrangement for 
the purpose of meeting DBE goals.
    (2) The DBE must itself own and operate at least one fully 
licensed, insured, and operational truck used on the contract.
    (3) The DBE receives credit for the total value of the 
transportation services it provides on the contract using trucks it 
owns, insures, and operates using drivers it employs.
    (4) The DBE may lease trucks from another DBE firm, including an 
owner-operator who is certified as a DBE. The DBE who leases trucks 
from another DBE receives credit for the total value of the 
transportation services the lessee DBE provides on the contract.
    (5) The DBE may also lease trucks from a non-DBE firm, including an 
owner-operator. The DBE who leases trucks from a non-DBE is entitled to 
credit only for the fee or commission it receives as a result of the 
lease arrangement. The DBE does not receive credit for the total value 
of the transportation services provided by the lessee, since these 
services are not provided by a DBE.
    (6) For purposes of this paragraph (d), a lease must indicate that 
the DBE has exclusive use of and control over the truck. This does not 
preclude the leased truck from working for others during the term of 
the lease with the consent of the DBE, so long as the lease gives the 
DBE absolute priority for use of the leased truck. Leased trucks must 
display the name and identification number of the DBE.
    (e) Count expenditures with DBEs for materials or supplies toward 
DBE goals as provided in the following:
    (1)(i) If the materials or supplies are obtained from a DBE 
manufacturer, count 100 percent of the cost of the materials or 
supplies toward DBE goals.
    (ii) For purposes of this paragraph (e)(1), a manufacturer is a 
firm that operates or maintains a factory or establishment that 
produces, on the premises, the materials, supplies, articles, or 
equipment required under the contract and of the general character 
described by the specifications.
    (2)(i) If the materials or supplies are purchased from a DBE 
regular dealer, count 60 percent of the cost of the materials or 
supplies toward DBE goals.
    (ii) For purposes of this section, a regular dealer is a firm that 
owns, operates, or maintains a store, warehouse, or other establishment 
in which the materials, supplies, articles or equipment of the general 
character described by the specifications and required under the 
contract are bought, kept in stock, and regularly sold or leased to the 
public in the usual course of business.
    (A) To be a regular dealer, the firm must be an established, 
regular business that engages, as its principal business and under its 
own name, in the purchase and sale or lease of the products in 
question.
    (B) A person may be a regular dealer in such bulk items as 
petroleum products, steel, cement, gravel, stone, or asphalt without 
owning, operating, or maintaining a place of business as provided in 
this paragraph (e)(2)(ii) if the person both owns and operates 
distribution equipment for the products. Any supplementing of regular 
dealers' own distribution equipment shall be by a long-term lease 
agreement and not on an ad hoc or contract-by-contract basis.
    (C) Packagers, brokers, manufacturers' representatives, or other 
persons who arrange or expedite transactions are not regular dealers 
within the meaning of this paragraph (e)(2).
    (3) With respect to materials or supplies purchased from a DBE 
which is neither a manufacturer nor a regular dealer, count the entire 
amount of fees or commissions charged for assistance in the procurement 
of the materials and supplies, or fees or transportation charges for 
the delivery of materials or supplies required on a job site, toward 
DBE goals, provided you determine the fees to be reasonable and not 
excessive as compared with fees customarily allowed for similar 
services. Do not count any portion of the cost of the materials and 
supplies themselves toward DBE goals, however.
    (f) If a firm is not currently certified as a DBE in accordance 
with the standards of subpart D of this part at the time of the 
execution of the contract, do not count the firm's participation toward 
any DBE goals, except as provided for in Sec. 26.87(i)).
    (g) Do not count the dollar value of work performed under a 
contract with a firm after it has ceased to be certified toward your 
overall goal.
    (h) Do not count the participation of a DBE subcontractor toward 
the prime contractor's DBE achievements or your overall goal until the 
amount being counted toward the goal has been paid to the DBE.

Subpart D--Certification Standards


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

    (a) In determining whether to certify a firm as eligible to 
participate as a DBE, you must apply the standards of this subpart.
    (b) The firm seeking certification has the burden of demonstrating 
to you, by a preponderance of the evidence, that it meets the 
requirements of this subpart concerning group membership or individual 
disadvantage, business size, ownership, and control.
    (c) You must rebuttably presume that members of the designated 
groups

[[Page 5136]]

identified in Sec. 26.67(a) are socially and economically 
disadvantaged. This means that they do not have the burden of proving 
to you that they are socially and economically disadvantaged. However, 
applicants have the obligation to provide you information concerning 
their economic disadvantage (see Sec. 26.67).
    (d) Individuals who are not presumed to be socially and 
economically disadvantaged, and individuals concerning whom the 
presumption of disadvantage has been rebutted, have the burden of 
proving to you, by a preponderance of the evidence, that they are 
socially and economically disadvantaged. (See Appendix E of this part.)
    (e) You must make determinations concerning whether individuals and 
firms have met their burden of demonstrating group membership, 
ownership, control, and social and economic disadvantage (where 
disadvantage must be demonstrated on an individual basis) by 
considering all the facts in the record, viewed as a whole.


Sec. 26.63  What rules govern group membership determinations?

    (a) If you have reason to question whether an individual is a 
member of a group that is presumed to be socially and economically 
disadvantaged, you must require the individual to demonstrate, by a 
preponderance of the evidence, that he or she is a member of the group.
    (b) In making such a determination, you must consider whether the 
person has held himself out to be a member of the group over a long 
period of time prior to application for certification and whether the 
person is regarded as a member of the group by the relevant community. 
You may require the applicant to produce appropriate documentation of 
group membership.
    (1) If you determine that an individual claiming to be a member of 
a group presumed to be disadvantaged is not a member of a designated 
disadvantaged group, the individual must demonstrate social and 
economic disadvantage on an individual basis.
    (2) Your decisions concerning membership in a designated group are 
subject to the certification appeals procedure of Sec. 26.89.


Sec. 26.65  What rules govern business size determinations?

    (a) To be an eligible DBE, a firm (including its affiliates) must 
be an existing small business, as defined by Small Business 
Administration (SBA) standards. You must apply current SBA business 
size standard(s) found in 13 CFR part 121 appropriate to the type(s) of 
work the firm seeks to perform in DOT-assisted contracts.
    (b) Even if it meets the requirements of paragraph (a) of this 
section, a firm is not an eligible DBE in any Federal fiscal year if 
the firm (including its affiliates) has had average annual gross 
receipts, as defined by SBA regulations (see 13 CFR 121.402), over the 
firm's previous three fiscal years, in excess of $16.6 million. The 
Secretary adjusts this amount for inflation from time to time.


Sec. 26.67  What rules determine social and economic disadvantage?

    (a) Presumption of disadvantage. (1) You must rebuttably presume 
that citizens of the United States (or lawfully admitted permanent 
residents) who are women, Black Americans, Hispanic Americans, Native 
Americans, Asian-Pacific Americans, Subcontinent Asian Americans, or 
other minorities found to be disadvantaged by the SBA, are socially and 
economically disadvantaged individuals. You must require applicants to 
submit a signed, notarized certification that each presumptively 
disadvantaged owner is, in fact, socially and economically 
disadvantaged.
    (2)(i) You must require each individual owner of a firm applying to 
participate as a DBE whose ownership and control are relied upon for 
DBE certification to submit a signed, notarized statement of personal 
net worth, with appropriate supporting documentation.
    (ii) In determining net worth, you must exclude an individual's 
ownership interest in the applicant firm and the individual's equity in 
his or her primary residence (except any portion of such equity that is 
attributable to excessive withdrawals from the applicant firm). A 
contingent liability does not reduce an individual's net worth. The 
personal net worth of an individual claiming to be an Alaska Native 
will include assets and income from sources other than an Alaska Native 
Corporation and exclude any of the following which the individual 
receives from any Alaska Native Corporation: cash (including cash 
dividends on stock received from an ANC) to the extent that it does 
not, in the aggregate, exceed $2,000 per individual per annum; stock 
(including stock issued or distributed by an ANC as a dividend or 
distribution on stock); a partnership interest; land or an interest in 
land (including land or an interest in land received from an ANC as a 
dividend or distribution on stock); and an interest in a settlement 
trust.
    (b) Rebuttal of presumption of disadvantage. (1) If the statement 
of personal net worth that an individual submits under paragraph (a)(2) 
of this section shows that the individual's personal net worth exceeds 
$750,000, the individual's presumption of economic disadvantage is 
rebutted. You are not required to have a proceeding under paragraph 
(b)(2) of this section in order to rebut the presumption of economic 
disadvantage in this case.
    (2) If you have a reasonable basis to believe that an individual 
who is a member of one of the designated groups is not, in fact, 
socially and/or economically disadvantaged you may, at any time, start 
a proceeding to determine whether the presumption should be regarded as 
rebutted with respect to that individual. Your proceeding must follow 
the procedures of Sec. 26.87.
    (3) In such a proceeding, you have the burden of demonstrating, by 
a preponderance of the evidence, that the individual is not socially 
and economically disadvantaged. You may require the individual to 
produce information relevant to the determination of his or her 
disadvantage.
    (4) When an individual's presumption of social and/or economic 
disadvantage has been rebutted, his or her ownership and control of the 
firm in question cannot be used for purposes of DBE eligibility under 
this subpart unless and until he or she makes an individual showing of 
social and/or economic disadvantage. If the basis for rebutting the 
presumption is a determination that the individual's personal net worth 
exceeds $750,000, the individual is no longer eligible for 
participation in the program and cannot regain eligibility by making an 
individual showing of disadvantage.
    (c) 8(a) and SDB Firms. If a firm applying for certification has a 
current, valid certification from or recognized by the SBA under the 
8(a) or small and disadvantaged business (SDB) program (except an SDB 
certification based on the firm's self-certification as an SDB), you 
may accept the firm's 8(a) or SDB certification in lieu of conducting 
your own certification proceeding, just as you may accept the 
certification of another DOT recipient for this purpose. You are not 
required to do so, however.
    (d) Individual determinations of social and economic disadvantage. 
Firms owned and controlled by individuals who are not presumed to be 
socially and economically disadvantaged (including individuals whose 
presumed disadvantage has been rebutted) may apply for DBE

[[Page 5137]]

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


Sec. 26.69  What rules govern determinations of ownership?

    (a) In determining whether the socially and economically 
disadvantaged participants in a firm own the firm, you must consider 
all the facts in the record, viewed as a whole.
    (b) To be an eligible DBE, a firm must be at least 51 percent owned 
by socially and economically disadvantaged individuals.
    (1) In the case of a corporation, such individuals must own at 
least 51 percent of the each class of voting stock outstanding and 51 
percent of the aggregate of all stock outstanding.
    (2) In the case of a partnership, 51 percent of each class of 
partnership interest must be owned by socially and economically 
disadvantaged individuals. Such ownership must be reflected in the 
firm's partnership agreement.
    (3) In the case of a limited liability company, at least 51 percent 
of each class of member interest must be owned by socially and 
economically disadvantaged individuals.
    (c) The firm's ownership by socially and economically disadvantaged 
individuals must be real, substantial, and continuing, going beyond pro 
forma ownership of the firm as reflected in ownership documents. The 
disadvantaged owners must enjoy the customary incidents of ownership, 
and share in the risks and profits commensurate with their ownership 
interests, as demonstrated by the substance, not merely the form, of 
arrangements.
    (d) All securities that constitute ownership of a firm shall be 
held directly by disadvantaged persons. Except as provided in this 
paragraph (d), no securities or assets held in trust, or by any 
guardian for a minor, are considered as held by disadvantaged persons 
in determining the ownership of a firm. However, securities or assets 
held in trust are regarded as held by a disadvantaged individual for 
purposes of determining ownership of the firm, if--
    (1) The beneficial owner of securities or assets held in trust is a 
disadvantaged individual, and the trustee is the same or another such 
individual; or
    (2) The beneficial owner of a trust is a disadvantaged individual 
who, rather than the trustee, exercises effective control over the 
management, policy-making, and daily operational activities of the 
firm. Assets held in a revocable living trust may be counted only in 
the situation where the same disadvantaged individual is the sole 
grantor, beneficiary, and trustee.
    (e) The contributions of capital or expertise by the socially and 
economically disadvantaged owners to acquire their ownership interests 
must be real and substantial. Examples of insufficient contributions 
include a promise to contribute capital, an unsecured note payable to 
the firm or an owner who is not a disadvantaged individual, or mere 
participation in a firm's activities as an employee. Debt instruments 
from financial institutions or other organizations that lend funds in 
the normal course of their business do not render a firm ineligible, 
even if the debtor's ownership interest is security for the loan.
    (f) The following requirements apply to situations in which 
expertise is relied upon as part of a disadvantaged owner's 
contribution to acquire ownership:
    (1) The owner's expertise must be--
    (i) In a specialized field;
    (ii) Of outstanding quality;
    (iii) In areas critical to the firm's operations;
    (iv) Indispensable to the firm's potential success;
    (v) Specific to the type of work the firm performs; and
    (vi) Documented in the records of the firm. These records must 
clearly show the contribution of expertise and its value to the firm.
    (2) The individual whose expertise is relied upon must have a 
significant financial investment in the firm.
    (g) You must always deem as held by a socially and economically 
disadvantaged individual, for purposes of determining ownership, all 
interests in a business or other assets obtained by the individual--
    (1) As the result of a final property settlement or court order in 
a divorce or legal separation, provided that no term or condition of 
the agreement or divorce decree is inconsistent with this section; or
    (2) Through inheritance, or otherwise because of the death of the 
former owner.
    (h)(1) You must presume as not being held by a socially and 
economically disadvantaged individual, for purposes of determining 
ownership, all interests in a business or other assets obtained by the 
individual as the result of a gift, or transfer without adequate 
consideration, from any non-disadvantaged individual or non-DBE firm 
who is--
    (i) Involved in the same firm for which the individual is seeking 
certification, or an affiliate of that firm;
    (ii) Involved in the same or a similar line of business; or
    (iii) Engaged in an ongoing business relationship with the firm, or 
an affiliate of the firm, for which the individual is seeking 
certification.
    (2) To overcome this presumption and permit the interests or assets 
to be counted, the disadvantaged individual must demonstrate to you, by 
clear and convincing evidence, that--
    (i) The gift or transfer to the disadvantaged individual was made 
for reasons other than obtaining certification as a DBE; and
    (ii) The disadvantaged individual actually controls the management, 
policy, and operations of the firm, notwithstanding the continuing 
participation of a non-disadvantaged individual who provided the gift 
or transfer.
    (i) You must apply the following rules in situations in which 
marital assets form a basis for ownership of a firm:
    (1) When marital assets (other than the assets of the business in 
question), held jointly or as community property by both spouses, are 
used to acquire the ownership interest asserted by one spouse, you must 
deem the ownership interest in the firm to have been acquired by that 
spouse with his or her own individual resources, provided that the 
other spouse irrevocably renounces and transfers all rights in the 
ownership interest in the manner sanctioned by the laws of the state in 
which either spouse or the firm is domiciled. You do not count a 
greater portion of joint or community property assets toward ownership 
than state law would recognize as belonging to the socially and 
economically disadvantaged owner of the applicant firm.
    (2) A copy of the document legally transferring and renouncing the 
other spouse's rights in the jointly owned or community assets used to 
acquire an ownership interest in the firm must be included as part of 
the firm's application for DBE certification.

[[Page 5138]]

    (j) You may consider the following factors in determining the 
ownership of a firm. However, you must not regard a contribution of 
capital as failing to be real and substantial, or find a firm 
ineligible, solely because--
    (1) A socially and economically disadvantaged individual acquired 
his or her ownership interest as the result of a gift, or transfer 
without adequate consideration, other than the types set forth in 
paragraph (h) of this section;
    (2) There is a provision for the co-signature of a spouse who is 
not a socially and economically disadvantaged individual on financing 
agreements, contracts for the purchase or sale of real or personal 
property, bank signature cards, or other documents; or
    (3) Ownership of the firm in question or its assets is transferred 
for adequate consideration from a spouse who is not a socially and 
economically disadvantaged individual to a spouse who is such an 
individual. In this case, you must give particularly close and careful 
scrutiny to the ownership and control of a firm to ensure that it is 
owned and controlled, in substance as well as in form, by a socially 
and economically disadvantaged individual.


Sec. 26.71  What rules govern determinations concerning control?

    (a) In determining whether socially and economically disadvantaged 
owners control a firm, you must consider all the facts in the record, 
viewed as a whole.
    (b) Only an independent business may be certified as a DBE. An 
independent business is one the viability of which does not depend on 
its relationship with another firm or firms.
    (1) In determining whether a potential DBE is an independent 
business, you must scrutinize relationships with non-DBE firms, in such 
areas as personnel, facilities, equipment, financial and/or bonding 
support, and other resources.
    (2) You must consider whether present or recent employer/employee 
relationships between the disadvantaged owner(s) of the potential DBE 
and non-DBE firms or persons associated with non-DBE firms compromise 
the independence of the potential DBE firm.
    (3) You must examine the firm's relationships with prime 
contractors to determine whether a pattern of exclusive or primary 
dealings with a prime contractor compromises the independence of the 
potential DBE firm.
    (4) In considering factors related to the independence of a 
potential DBE firm, you must consider the consistency of relationships 
between the potential DBE and non-DBE firms with normal industry 
practice.
    (c) A DBE firm must not be subject to any formal or informal 
restrictions which limit the customary discretion of the socially and 
economically disadvantaged owners. There can be no restrictions through 
corporate charter provisions, by-law provisions, contracts or any other 
formal or informal devices (e.g., cumulative voting rights, voting 
powers attached to different classes of stock, employment contracts, 
requirements for concurrence by non-disadvantaged partners, conditions 
precedent or subsequent, executory agreements, voting trusts, 
restrictions on or assignments of voting rights) that prevent the 
socially and economically disadvantaged owners, without the cooperation 
or vote of any non-disadvantaged individual, from making any business 
decision of the firm. This paragraph does not preclude a spousal co-
signature on documents as provided for in Sec. 26.69(j)(2).
    (d) The socially and economically disadvantaged owners must possess 
the power to direct or cause the direction of the management and 
policies of the firm and to make day-to-day as well as long-term 
decisions on matters of management, policy and operations.
    (1) A disadvantaged owner must hold the highest officer position in 
the company (e.g., chief executive officer or president).
    (2) In a corporation, disadvantaged owners must control the board 
of directors.
    (3) In a partnership, one or more disadvantaged owners must serve 
as general partners, with control over all partnership decisions.
    (e) Individuals who are not socially and economically disadvantaged 
may be involved in a DBE firm as owners, managers, employees, 
stockholders, officers, and/or directors. Such individuals must not, 
however, possess or exercise the power to control the firm, or be 
disproportionately responsible for the operation of the firm.
    (f) The socially and economically disadvantaged owners of the firm 
may delegate various areas of the management, policymaking, or daily 
operations of the firm to other participants in the firm, regardless of 
whether these participants are socially and economically disadvantaged 
individuals. Such delegations of authority must be revocable, and the 
socially and economically disadvantaged owners must retain the power to 
hire and fire any person to whom such authority is delegated. The 
managerial role of the socially and economically disadvantaged owners 
in the firm's overall affairs must be such that the recipient can 
reasonably conclude that the socially and economically disadvantaged 
owners actually exercise control over the firm's operations, 
management, and policy.
    (g) The socially and economically disadvantaged owners must have an 
overall understanding of, and managerial and technical competence and 
experience directly related to, the type of business in which the firm 
is engaged and the firm's operations. The socially and economically 
disadvantaged owners are not required to have experience or expertise 
in every critical area of the firm's operations, or to have greater 
experience or expertise in a given field than managers or key 
employees. The socially and economically disadvantaged owners must have 
the ability to intelligently and critically evaluate information 
presented by other participants in the firm's activities and to use 
this information to make independent decisions concerning the firm's 
daily operations, management, and policymaking. Generally, expertise 
limited to office management, administration, or bookkeeping functions 
unrelated to the principal business activities of the firm is 
insufficient to demonstrate control.
    (h) If state or local law requires the persons to have a particular 
license or other credential in order to own and/or control a certain 
type of firm, then the socially and economically disadvantaged persons 
who own and control a potential DBE firm of that type must possess the 
required license or credential. If state or local law does not require 
such a person to have such a license or credential to own and/or 
control a firm, you must not deny certification solely on the ground 
that the person lacks the license or credential. However, you may take 
into account the absence of the license or credential as one factor in 
determining whether the socially and economically disadvantaged owners 
actually control the firm.
    (i)(1) You may consider differences in remuneration between the 
socially and economically disadvantaged owners and other participants 
in the firm in determining whether to certify a firm as a DBE. Such 
consideration shall be in the context of the duties of the persons 
involved, normal industry practices, the firm's policy and practice 
concerning reinvestment of income, and any other explanations for the 
differences proffered by the firm. You may determine that a firm is 
controlled by its socially and economically disadvantaged owner 
although that

[[Page 5139]]

owner's remuneration is lower than that of some other participants in 
the firm.
    (2) In a case where a non-disadvantaged individual formerly 
controlled the firm, and a socially and economically disadvantaged 
individual now controls it, you may consider a difference between the 
remuneration of the former and current controller of the firm as a 
factor in determining who controls the firm, particularly when the non-
disadvantaged individual remains involved with the firm and continues 
to receive greater compensation than the disadvantaged individual.
    (j) In order to be viewed as controlling a firm, a socially and 
economically disadvantaged owner cannot engage in outside employment or 
other business interests that conflict with the management of the firm 
or prevent the individual from devoting sufficient time and attention 
to the affairs of the firm to control its activities. For example, 
absentee ownership of a business and part-time work in a full-time firm 
are not viewed as constituting control. However, an individual could be 
viewed as controlling a part-time business that operates only on 
evenings and/or weekends, if the individual controls it all the time it 
is operating.
    (k)(1) A socially and economically disadvantaged individual may 
control a firm even though one or more of the individual's immediate 
family members (who themselves are not socially and economically 
disadvantaged individuals) participate in the firm as a manager, 
employee, owner, or in another capacity. Except as otherwise provided 
in this paragraph, you must make a judgment about the control the 
socially and economically disadvantaged owner exercises vis-a-vis other 
persons involved in the business as you do in other situations, without 
regard to whether or not the other persons are immediate family 
members.
    (2) If you cannot determine that the socially and economically 
disadvantaged owners--as distinct from the family as a whole--control 
the firm, then the socially and economically disadvantaged owners have 
failed to carry their burden of proof concerning control, even though 
they may participate significantly in the firm's activities.
    (l) Where a firm was formerly owned and/or controlled by a non-
disadvantaged individual (whether or not an immediate family member), 
ownership and/or control were transferred to a socially and 
economically disadvantaged individual, and the non-disadvantaged 
individual remains involved with the firm in any capacity, the 
disadvantaged individual now owning the firm must demonstrate to you, 
by clear and convincing evidence, that:
    (1) The transfer of ownership and/or control to the disadvantaged 
individual was made for reasons other than obtaining certification as a 
DBE; and
    (2) The disadvantaged individual actually controls the management, 
policy, and operations of the firm, notwithstanding the continuing 
participation of a non-disadvantaged individual who formerly owned and/
or controlled the firm.
    (m) In determining whether a firm is controlled by its socially and 
economically disadvantaged owners, you may consider whether the firm 
owns equipment necessary to perform its work. However, you must not 
determine that a firm is not controlled by socially and economically 
disadvantaged individuals solely because the firm leases, rather than 
owns, such equipment, where leasing equipment is a normal industry 
practice and the lease does not involve a relationship with a prime 
contractor or other party that compromises the independence of the 
firm.
    (n) You must grant certification to a firm only for specific types 
of work in which the socially and economically disadvantaged owners 
have the ability to control the firm. To become certified in an 
additional type of work, the firm need demonstrate to you only that its 
socially and economically disadvantaged owners are able to control the 
firm with respect to that type of work. You may not, in this situation, 
require that the firm be recertified or submit a new application for 
certification, but you must verify the disadvantaged owner's control of 
the firm in the additional type of work.
    (o) A business operating under a franchise or license agreement may 
be certified if it meets the standards in this subpart and the 
franchiser or licenser is not affiliated with the franchisee or 
licensee. In determining whether affiliation exists, you should 
generally not consider the restraints relating to standardized quality, 
advertising, accounting format, and other provisions imposed on the 
franchisee or licensee by the franchise agreement or license, provided 
that the franchisee or licensee has the right to profit from its 
efforts and bears the risk of loss commensurate with ownership. 
Alternatively, even though a franchisee or licensee may not be 
controlled by virtue of such provisions in the franchise agreement or 
license, affiliation could arise through other means, such as common 
management or excessive restrictions on the sale or transfer of the 
franchise interest or license.
    (p) In order for a partnership to be controlled by socially and 
economically disadvantaged individuals, any non-disadvantaged partners 
must not have the power, without the specific written concurrence of 
the socially and economically disadvantaged partner(s), to 
contractually bind the partnership or subject the partnership to 
contract or tort liability.
    (q) The socially and economically disadvantaged individuals 
controlling a firm may use an employee leasing company. The use of such 
a company does not preclude the socially and economically disadvantaged 
individuals from controlling their firm if they continue to maintain an 
employer-employee relationship with the leased employees. This includes 
being responsible for hiring, firing, training, assigning, and 
otherwise controlling the on-the-job activities of the employees, as 
well as ultimate responsibility for wage and tax obligations related to 
the employees.


Sec. 26.73  What are other rules affecting certification?

    (a)(1) Consideration of whether a firm performs a commercially 
useful function or is a regular dealer pertains solely to counting 
toward DBE goals the participation of firms that have already been 
certified as DBEs. Except as provided in paragraph (a)(2) of this 
section, you must not consider commercially useful function issues in 
any way in making decisions about whether to certify a firm as a DBE.
    (2) You may consider, in making certification decisions, whether a 
firm has exhibited a pattern of conduct indicating its involvement in 
attempts to evade or subvert the intent or requirements of the DBE 
program.
    (b) You must evaluate the eligibility of a firm on the basis of 
present circumstances. You must not refuse to certify a firm based 
solely on historical information indicating a lack of ownership or 
control of the firm by socially and economically disadvantaged 
individuals at some time in the past, if the firm currently meets the 
ownership and control standards of this part. Nor must you refuse to 
certify a firm solely on the basis that it is a newly formed firm.
    (c) DBE firms and firms seeking DBE certification shall cooperate 
fully with your requests (and DOT requests) for information relevant to 
the certification process. Failure or refusal to provide such 
information is a ground for a denial or removal of certification.

[[Page 5140]]

    (d) Only firms organized for profit may be eligible DBEs. Not-for-
profit organizations, even though controlled by socially and 
economically disadvantaged individuals, are not eligible to be 
certified as DBEs.
    (e) An eligible DBE firm must be owned by individuals who are 
socially and economically disadvantaged. Except as provided in this 
paragraph, a firm that is not owned by such individuals, but instead is 
owned by another firm--even a DBE firm--cannot be an eligible DBE.
    (1) If socially and economically disadvantaged individuals own and 
control a firm through a parent or holding company, established for 
tax, capitalization or other purposes consistent with industry 
practice, and the parent or holding company in turn owns and controls 
an operating subsidiary, you may certify the subsidiary if it otherwise 
meets all requirements of this subpart. In this situation, the 
individual owners and controllers of the parent or holding company are 
deemed to control the subsidiary through the parent or holding company.
    (2) You may certify such a subsidiary only if there is cumulatively 
51 percent ownership of the subsidiary by socially and economically 
disadvantaged individuals. The following examples illustrate how this 
cumulative ownership provision works:

    Example 1: Socially and economically disadvantaged individuals 
own 100 percent of a holding company, which has a wholly-owned 
subsidiary. The subsidiary may be certified, if it meets all other 
requirements.
    Example 2: Disadvantaged individuals own 100 percent of the 
holding company, which owns 51 percent of a subsidiary. The 
subsidiary may be certified, if all other requirements are met.
    Example 3: Disadvantaged individuals own 80 percent of the 
holding company, which in turn owns 70 percent of a subsidiary. In 
this case, the cumulative ownership of the subsidiary by 
disadvantaged individuals is 56 percent (80 percent of the 70 
percent). This is more than 51 percent, so you may certify the 
subsidiary, if all other requirements are met.
    Example 4: Same as Example 2 or 3, but someone other than the 
socially and economically disadvantaged owners of the parent or 
holding company controls the subsidiary. Even though the subsidiary 
is owned by disadvantaged individuals, through the holding or parent 
company, you cannot certify it because it fails to meet control 
requirements.
    Example 5: Disadvantaged individuals own 60 percent of the 
holding company, which in turn owns 51 percent of a subsidiary. In 
this case, the cumulative ownership of the subsidiary by 
disadvantaged individuals is about 31 percent. This is less than 51 
percent, so you cannot certify the subsidiary.
    Example 6: The holding company, in addition to the subsidiary 
seeking certification, owns several other companies. The combined 
gross receipts of the holding companies and its subsidiaries are 
greater than the size standard for the subsidiary seeking 
certification and/or the gross receipts cap of Sec. 26.65(b). Under 
the rules concerning affiliation, the subsidiary fails to meet the 
size standard and cannot be certified.

    (f) Recognition of a business as a separate entity for tax or 
corporate purposes is not necessarily sufficient to demonstrate that a 
firm is an independent business, owned and controlled by socially and 
economically disadvantaged individuals.
    (g) You must not require a DBE firm to be prequalified as a 
condition for certification unless the recipient requires all firms 
that participate in its contracts and subcontracts to be prequalified.
    (h) A firm that is owned by an Indian tribe, Alaska Native 
Corporation, or Native Hawaiian organization as an entity, rather than 
by Indians, Alaska Natives, or Native Hawaiians as individuals, may be 
eligible for certification. Such a firm must meet the size standards of 
Sec. 26.65. Such a firm must be controlled by socially and economically 
disadvantaged individuals, as provided in Sec. 26.71.

Subpart E--Certification Procedures


Sec. 26.81  What are the requirements for Unified Certification 
Programs?

    (a) You and all other DOT recipients in your state must participate 
in a Unified Certification Program (UCP).
    (1) Within three years of March 4, 1999, you and the other 
recipients in your state must sign an agreement establishing the UCP 
for that state and submit the agreement to the Secretary for approval. 
The Secretary may, on the basis of extenuating circumstances shown by 
the recipients in the state, extend this deadline for no more than one 
additional year.
    (2) The agreement must provide for the establishment of a UCP 
meeting all the requirements of this section. The agreement must 
specify that the UCP will follow all certification procedures and 
standards of this part, on the same basis as recipients; that the UCP 
shall cooperate fully with oversight, review, and monitoring activities 
of DOT and its operating administrations; and that the UCP shall 
implement DOT directives and guidance concerning certification matters. 
The agreement shall also commit recipients to ensuring that the UCP has 
sufficient resources and expertise to carry out the requirements of 
this part. The agreement shall include an implementation schedule 
ensuring that the UCP is fully operational no later than 18 months 
following the approval of the agreement by the Secretary.
    (3) Subject to approval by the Secretary, the UCP in each state may 
take any form acceptable to the recipients in that state.
    (4) The Secretary shall review the UCP and approve it, disapprove 
it, or remand it to the recipients in the state for revisions. A 
complete agreement which is not disapproved or remanded within 180 days 
of its receipt is deemed to be accepted.
    (5) If you and the other recipients in your state fail to meet the 
deadlines set forth in this paragraph (a), you shall have the 
opportunity to make an explanation to the Secretary why a deadline 
could not be met and why meeting the deadline was beyond your control. 
If you fail to make such an explanation, or the explanation does not 
justify the failure to meet the deadline, the Secretary shall direct 
you to complete the required action by a date certain. If you and the 
other recipients fail to carry out this direction in a timely manner, 
you are collectively in noncompliance with this part.
    (b) The UCP shall make all certification decisions on behalf of all 
DOT recipients in the state with respect to participation in the DOT 
DBE Program.
    (1) Certification decisions by the UCP shall be binding on all DOT 
recipients within the state.
    (2) The UCP shall provide ``one-stop shopping'' to applicants for 
certification, such that an applicant is required to apply only once 
for a DBE certification that will be honored by all recipients in the 
state.
    (3) All obligations of recipients with respect to certification and 
nondiscrimination must be carried out by UCPs, and recipients may use 
only UCPs that comply with the certification and nondiscrimination 
requirements of this part.
    (c) All certifications by UCPs shall be pre-certifications; i.e., 
certifications that have been made final before the due date for bids 
or offers on a contract on which a firm seeks to participate as a DBE.
    (d) A UCP is not required to process an application for 
certification from a firm having its principal place of business 
outside the state if the firm is not certified by the UCP in the state 
in which it maintains its principal place of business. The ``home 
state'' UCP shall share its information and documents concerning the 
firm with other UCPs that are considering the firm's application.

[[Page 5141]]

    (e) Subject to DOT approval as provided in this section, the 
recipients in two or more states may form a regional UCP. UCPs may also 
enter into written reciprocity agreements with other UCPs. Such an 
agreement shall outline the specific responsibilities of each 
participant. A UCP may accept the certification of any other UCP or DOT 
recipient.
    (f) Pending the establishment of UCPs meeting the requirements of 
this section, you may enter into agreements with other recipients, on a 
regional or inter-jurisdictional basis, to perform certification 
functions required by this part. You may also grant reciprocity to 
other recipient's certification decisions.
    (g) Each UCP shall maintain a unified DBE directory containing, for 
all firms certified by the UCP (including those from other states 
certified under the provisions of this section), the information 
required by Sec. 26.31. The UCP shall make the directory available to 
the public electronically, on the internet, as well as in print. The 
UCP shall update the electronic version of the directory by including 
additions, deletions, and other changes as soon as they are made.
    (h) Except as otherwise specified in this section, all provisions 
of this subpart and subpart D of this part pertaining to recipients 
also apply to UCPs.


Sec. 26.83  What procedures do recipients follow in making 
certification decisions?

    (a) You must ensure that only firms certified as eligible DBEs 
under this section participate as DBEs in your program.
    (b) You must determine the eligibility of firms as DBEs consistent 
with the standards of subpart D of this part. When a UCP is formed, the 
UCP must meet all the requirements of subpart D of this part and this 
subpart that recipients are required to meet.
    (c) You must take all the following steps in determining whether a 
DBE firm meets the standards of subpart D of this part:
    (1) Perform an on-site visit to the offices of the firm. You must 
interview the principal officers of the firm and review their resumes 
and/or work histories. You must also perform an on-site visit to job 
sites if there are such sites on which the firm is working at the time 
of the eligibility investigation in your jurisdiction or local area. 
You may rely upon the site visit report of any other recipient with 
respect to a firm applying for certification;
    (2) If the firm is a corporation, analyze the ownership of stock in 
the firm;
    (3) Analyze the bonding and financial capacity of the firm;
    (4) Determine the work history of the firm, including contracts it 
has received and work it has completed;
    (5) Obtain a statement from the firm of the type of work it prefers 
to perform as part of the DBE program and its preferred locations for 
performing the work, if any;
    (6) Obtain or compile a list of the equipment owned by or available 
to the firm and the licenses the firm and its key personnel possess to 
perform the work it seeks to do as part of the DBE program;
    (7) Require potential DBEs to complete and submit an appropriate 
application form.
    (i) Uniform form. [Reserved]
    (ii) You must make sure that the applicant attests to the accuracy 
and truthfulness of the information on the application form. This shall 
be done either in the form of an affidavit sworn to by the applicant 
before a person who is authorized by state law to administer oaths or 
in the form of an unsworn declaration executed under penalty of perjury 
of the laws of the United States.
    (iii) You must review all information on the form prior to making a 
decision about the eligibility of the firm.
    (d) When another recipient, in connection with its consideration of 
the eligibility of a firm, makes a written request for certification 
information you have obtained about that firm (e.g., including 
application materials or the report of a site visit, if you have made 
one to the firm), you must promptly make the information available to 
the other recipient.
    (e) When another DOT recipient has certified a firm, you have 
discretion to take any of the following actions:
    (1) Certify the firm in reliance on the certification decision of 
the other recipient;
    (2) Make an independent certification decision based on 
documentation provided by the other recipient, augmented by any 
additional information you require the applicant to provide; or
    (3) Require the applicant to go through your application process 
without regard to the action of the other recipient.
    (f) Subject to the approval of the concerned operating 
administration as part of your DBE program, you may impose a reasonable 
application fee for certification. Fee waivers shall be made in 
appropriate cases.
    (g) You must safeguard from disclosure to unauthorized persons 
information gathered as part of the certification process that may 
reasonably be regarded as proprietary or other confidential business 
information, consistent with applicable Federal, state, and local law.
    (h) Once you have certified a DBE, it shall remain certified for a 
period of at least three years unless and until its certification has 
been removed through the procedures of Sec. 26.87. You may not require 
DBEs to reapply for certification as a condition of continuing to 
participate in the program during this three-year period, unless the 
factual basis on which the certification was made changes.
    (i) If you are a DBE, you must inform the recipient or UCP in 
writing of any change in circumstances affecting your ability to meet 
size, disadvantaged status, ownership, or control requirements of this 
part or any material change in the information provided in your 
application form.
    (1) Changes in management responsibility among members of a limited 
liability company are covered by this requirement.
    (2) You must attach supporting documentation describing in detail 
the nature of such changes.
    (3) The notice must take the form of an affidavit sworn to by the 
applicant before a person who is authorized by state law to administer 
oaths or of an unsworn declaration executed under penalty of perjury of 
the laws of the United States. You must provide the written 
notification within 30 days of the occurrence of the change. If you 
fail to make timely notification of such a change, you will be deemed 
to have failed to cooperate under Sec. 26.109(c).
    (j) If you are a DBE, you must provide to the recipient, every year 
on the anniversary of the date of your certification, an affidavit 
sworn to by the firm's owners before a person who is authorized by 
state law to administer oaths or an unsworn declaration executed under 
penalty of perjury of the laws of the United States. This affidavit 
must affirm that there have been no changes in the firm's circumstances 
affecting its ability to meet size, disadvantaged status, ownership, or 
control requirements of this part or any material changes in the 
information provided in its application form, except for changes about 
which you have notified the recipient under paragraph (i) of this 
section. The affidavit shall specifically affirm that your firm 
continues to meet SBA business size criteria and the overall gross 
receipts cap of this part, documenting this affirmation with supporting 
documentation of your firm's size and gross receipts. If you fail to 
provide this affidavit in a timely manner, you will be

[[Page 5142]]

deemed to have failed to cooperate under Sec. 26.109(c).
    (k) If you are a recipient, you must make decisions on applications 
for certification within 90 days of receiving from the applicant firm 
all information required under this part. You may extend this time 
period once, for no more than an additional 60 days, upon written 
notice to the firm, explaining fully and specifically the reasons for 
the extension. You may establish a different time frame in your DBE 
program, upon a showing that this time frame is not feasible, and 
subject to the approval of the concerned operating administration. Your 
failure to make a decision by the applicable deadline under this 
paragraph is deemed a constructive denial of the application, on the 
basis of which the firm may appeal to DOT under Sec. 26.89.


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

    (a) When you deny a request by a firm, which is not currently 
certified with you, to be certified as a DBE, you must provide the firm 
a written explanation of the reasons for the denial, specifically 
referencing the evidence in the record that supports each reason for 
the denial. All documents and other information on which the denial is 
based must be made available to the applicant, on request.
    (b) When a firm is denied certification, you must establish a time 
period of no more than twelve months that must elapse before the firm 
may reapply to the recipient for certification. You may provide, in 
your DBE program, subject to approval by the concerned operating 
administration, a shorter waiting period for reapplication. The time 
period for reapplication begins to run on the date the explanation 
required by paragraph (a) of this section is received by the firm.
    (c) When you make an administratively final denial of certification 
concerning a firm, the firm may appeal the denial to the Department 
under Sec. 26.89.


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

    (a) Ineligibility complaints. (1) Any person may file with you a 
written complaint alleging that a currently-certified firm is 
ineligible and specifying the alleged reasons why the firm is 
ineligible. You are not required to accept a general allegation that a 
firm is ineligible or an anonymous complaint. The complaint may include 
any information or arguments supporting the complainant's assertion 
that the firm is ineligible and should not continue to be certified. 
Confidentiality of complainants' identities must be protected as 
provided in Sec. 26.109(b).
    (2) You must review your records concerning the firm, any material 
provided by the firm and the complainant, and other available 
information. You may request additional information from the firm or 
conduct any other investigation that you deem necessary.
    (3) If you determine, based on this review, that there is 
reasonable cause to believe that the firm is ineligible, you must 
provide written notice to the firm that you propose to find the firm 
ineligible, setting forth the reasons for the proposed determination. 
If you determine that such reasonable cause does not exist, you must 
notify the complainant and the firm in writing of this determination 
and the reasons for it. All statements of reasons for findings on the 
issue of reasonable cause must specifically reference the evidence in 
the record on which each reason is based.
    (b) Recipient-initiated proceedings. If, based on notification by 
the firm of a change in its circumstances or other information that 
comes to your attention, you determine that there is reasonable cause 
to believe that a currently certified firm is ineligible, you must 
provide written notice to the firm that you propose to find the firm 
ineligible, setting forth the reasons for the proposed determination. 
The statement of reasons for the finding of reasonable cause must 
specifically reference the evidence in the record on which each reason 
is based.
    (c) DOT directive to initiate proceeding. (1) If the concerned 
operating administration determines that information in your 
certification records, or other information available to the concerned 
operating administration, provides reasonable cause to believe that a 
firm you certified does not meet the eligibility criteria of this part, 
the concerned operating administration may direct you to initiate a 
proceeding to remove the firm's certification.
    (2) The concerned operating administration must provide you and the 
firm a notice setting forth the reasons for the directive, including 
any relevant documentation or other information.
    (3) You must immediately commence and prosecute a proceeding to 
remove eligibility as provided by paragraph (b) of this section.
    (d) Hearing. When you notify a firm that there is reasonable cause 
to remove its eligibility, as provided in paragraph (a), (b), or (c) of 
this section, you must give the firm an opportunity for an informal 
hearing, at which the firm may respond to the reasons for the proposal 
to remove its eligibility in person and provide information and 
arguments concerning why it should remain certified.
    (1) In such a proceeding, you bear the burden of proving, by a 
preponderance of the evidence, that the firm does not meet the 
certification standards of this part.
    (2) You must maintain a complete record of the hearing, by any 
means acceptable under state law for the retention of a verbatim record 
of an administrative hearing. If there is an appeal to DOT under 
Sec. 26.89, you must provide a transcript of the hearing to DOT and, on 
request, to the firm. You must retain the original record of the 
hearing. You may charge the firm only for the cost of copying the 
record.
    (3) The firm may elect to present information and arguments in 
writing, without going to a hearing. In such a situation, you bear the 
same burden of proving, by a preponderance of the evidence, that the 
firm does not meet the certification standards, as you would during a 
hearing.
    (e) Separation of functions. You must ensure that the decision in a 
proceeding to remove a firm's eligibility is made by an office and 
personnel that did not take part in actions leading to or seeking to 
implement the proposal to remove the firm's eligibility and are not 
subject, with respect to the matter, to direction from the office or 
personnel who did take part in these actions.
    (1) Your method of implementing this requirement must be made part 
of your DBE program.
    (2) The decisionmaker must be an individual who is knowledgeable 
about the certification requirements of your DBE program and this part.
    (3) Before a UCP is operational in its state, a small airport or 
small transit authority (i.e., an airport or transit authority serving 
an area with less than 250,000 population) is required to meet this 
requirement only to the extent feasible.
    (f) Grounds for decision. You must not base a decision to remove 
eligibility on a reinterpretation or changed opinion of information 
available to the recipient at the time of its certification of the 
firm. You may base such a decision only on one or more of the 
following:
    (1) Changes in the firm's circumstances since the certification of 
the firm by the recipient that render the firm unable to meet the 
eligibility standards of this part;

[[Page 5143]]

    (2) Information or evidence not available to you at the time the 
firm was certified;
    (3) Information that was concealed or misrepresented by the firm in 
previous certification actions by a recipient;
    (4) A change in the certification standards or requirements of the 
Department since you certified the firm; or
    (5) A documented finding that your determination to certify the 
firm was factually erroneous.
    (g) Notice of decision. Following your decision, you must provide 
the firm written notice of the decision and the reasons for it, 
including specific references to the evidence in the record that 
supports each reason for the decision. The notice must inform the firm 
of the consequences of your decision and of the availability of an 
appeal to the Department of Transportation under Sec. 26.89. You must 
send copies of the notice to the complainant in an ineligibility 
complaint or the concerned operating administration that had directed 
you to initiate the proceeding.
    (h) Status of firm during proceeding. (1) A firm remains an 
eligible DBE during the pendancy of your proceeding to remove its 
eligibility.
    (2) The firm does not become ineligible until the issuance of the 
notice provided for in paragraph (g) of this section.
    (i) Effects of removal of eligibility. When you remove a firm's 
eligibility, you must take the following action:
    (1) When a prime contractor has made a commitment to using the 
ineligible firm, or you have made a commitment to using a DBE prime 
contractor, but a subcontract or contract has not been executed before 
you issue the decertification notice provided for in paragraph (g) of 
this section, the ineligible firm does not count toward the contract 
goal or overall goal. You must direct the prime contractor to meet the 
contract goal with an eligible DBE firm or demonstrate to you that it 
has made a good faith effort to do so.
    (2) If a prime contractor has executed a subcontract with the firm 
before you have notified the firm of its ineligibility, the prime 
contractor may continue to use the firm on the contract and may 
continue to receive credit toward its DBE goal for the firm's work. In 
this case, or in a case where you have let a prime contract to the DBE 
that was later ruled ineligible, the portion of the ineligible firm's 
performance of the contract remaining after you issued the notice of 
its ineligibility shall not count toward your overall goal, but may 
count toward the contract goal.
    (3) Exception: If the DBE's ineligibility is caused solely by its 
having exceeded the size standard during the performance of the 
contract, you may continue to count its participation on that contract 
toward overall and contract goals.
    (j) Availability of appeal. When you make an administratively final 
removal of a firm's eligibility under this section, the firm may appeal 
the removal to the Department under Sec. 26.89.


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

    (a)(1) If you are a firm which is denied certification or whose 
eligibility is removed by a recipient, you may make an administrative 
appeal to the Department.
    (2) If you are a complainant in an ineligibility complaint to a 
recipient (including the concerned operating administration in the 
circumstances provided in Sec. 26.87(c)), you may appeal to the 
Department if the recipient does not find reasonable cause to propose 
removing the firm's eligibility or, following a removal of eligibility 
proceeding, determines that the firm is eligible.
    (3) Send appeals to the following address: Department of 
Transportation, Office of Civil Rights, 400 7th Street, SW, Room 2401, 
Washington, DC 20590.
    (b) Pending the Department's decision in the matter, the 
recipient's decision remains in effect. The Department does not stay 
the effect of the recipient's decision while it is considering an 
appeal.
    (c) If you want to file an appeal, you must send a letter to the 
Department within 90 days of the date of the recipient's final 
decision, including information and arguments concerning why the 
recipient's decision should be reversed. The Department may accept an 
appeal filed later than 90 days after the date of the decision if the 
Department determines that there was good cause for the late filing of 
the appeal.
    (1) If you are an appellant who is a firm which has been denied 
certification, whose certification has been removed, whose owner is 
determined not to be a member of a designated disadvantaged group, or 
concerning whose owner the presumption of disadvantage has been 
rebutted, your letter must state the name and address of any other 
recipient which currently certifies the firm, which has rejected an 
application for certification from the firm or removed the firm's 
eligibility within one year prior to the date of the appeal, or before 
which an application for certification or a removal of eligibility is 
pending. Failure to provide this information may be deemed a failure to 
cooperate under Sec. 26.109(c).
    (2) If you are an appellant other than one described in paragraph 
(c)(1) of this section, the Department will request, and the firm whose 
certification has been questioned shall promptly provide, the 
information called for in paragraph (c)(1) of this section. Failure to 
provide this information may be deemed a failure to cooperate under 
Sec. 26.109(c).
    (d) When it receives an appeal, the Department requests a copy of 
the recipient's complete administrative record in the matter. If you 
are the recipient, you must provide the administrative record, 
including a hearing transcript, within 20 days of the Department's 
request. The Department may extend this time period on the basis of a 
recipient's showing of good cause. To facilitate the Department's 
review of a recipient's decision, you must ensure that such 
administrative records are well organized, indexed, and paginated. 
Records that do not comport with these requirements are not acceptable 
and will be returned to you to be corrected immediately. If an appeal 
is brought concerning one recipient's certification decision concerning 
a firm, and that recipient relied on the decision and/or administrative 
record of another recipient, this requirement applies to both 
recipients involved.
    (e) The Department makes its decision based solely on the entire 
administrative record. The Department does not make a de novo review of 
the matter and does not conduct a hearing. The Department may 
supplement the administrative record by adding relevant information 
made available by the DOT Office of Inspector General; Federal, state, 
or local law enforcement authorities; officials of a DOT operating 
administration or other appropriate DOT office; a recipient; or a firm 
or other private party.
    (f) As a recipient, when you provide supplementary information to 
the Department, you shall also make this information available to the 
firm and any third-party complainant involved, consistent with Federal 
or applicable state laws concerning freedom of information and privacy. 
The Department makes available, on request by the firm and any third-
party complainant involved, any supplementary information it receives 
from any source.
    (1) The Department affirms your decision unless it determines, 
based on the entire administrative record, that your decision is 
unsupported by

[[Page 5144]]

substantial evidence or inconsistent with the substantive or procedural 
provisions of this part concerning certification.
    (2) If the Department determines, after reviewing the entire 
administrative record, that your decision was unsupported by 
substantial evidence or inconsistent with the substantive or procedural 
provisions of this part concerning certification, the Department 
reverses your decision and directs you to certify the firm or remove 
its eligibility, as appropriate. You must take the action directed by 
the Department's decision immediately upon receiving written notice of 
it.
    (3) The Department is not required to reverse your decision if the 
Department determines that a procedural error did not result in 
fundamental unfairness to the appellant or substantially prejudice the 
opportunity of the appellant to present its case.
    (4) If it appears that the record is incomplete or unclear with 
respect to matters likely to have a significant impact on the outcome 
of the case, the Department may remand the record to you with 
instructions seeking clarification or augmentation of the record before 
making a finding. The Department may also remand a case to you for 
further proceedings consistent with Department instructions concerning 
the proper application of the provisions of this part.
    (5) The Department does not uphold your decision based on grounds 
not specified in your decision.
    (6) The Department's decision is based on the status and 
circumstances of the firm as of the date of the decision being 
appealed.
    (7) The Department provides written notice of its decision to you, 
the firm, and the complainant in an ineligibility complaint. A copy of 
the notice is also sent to any other recipient whose administrative 
record or decision has been involved in the proceeding (see paragraph 
(d) of this section). The notice includes the reasons for the 
Department's decision, including specific references to the evidence in 
the record that supports each reason for the decision.
    (8) The Department's policy is to make its decision within 180 days 
of receiving the complete administrative record. If the Department does 
not make its decision within this period, the Department provides 
written notice to concerned parties, including a statement of the 
reason for the delay and a date by which the appeal decision will be 
made.
    (g) All decisions under this section are administratively final, 
and are not subject to petitions for reconsideration.


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

    (a) If you are the recipient from whose action an appeal under 
Sec. 26.89 is taken, the decision is binding. It is not binding on 
other recipients.
    (b) If you are a recipient to which a DOT determination under 
Sec. 26.89 is applicable, you must take the following action:
    (1) If the Department determines that you erroneously certified a 
firm, you must remove the firm's eligibility on receipt of the 
determination, without further proceedings on your part. Effective on 
the date of your receipt of the Department's determination, the 
consequences of a removal of eligibility set forth in Sec. 26.87(i) 
take effect.
    (2) If the Department determines that you erroneously failed to 
find reasonable cause to remove the firm's eligibility, you must 
expeditiously commence a proceeding to determine whether the firm's 
eligibility should be removed, as provided in Sec. 26.87.
    (3) If the Department determines that you erroneously declined to 
certify or removed the eligibility of the firm, you must certify the 
firm, effective on the date of your receipt of the written notice of 
Department's determination.
    (4) If the Department determines that you erroneously determined 
that the presumption of social and economic disadvantage either should 
or should not be deemed rebutted, you must take appropriate corrective 
action as determined by the Department.
    (5) If the Department affirms your determination, no further action 
is necessary.
    (c) Where DOT has upheld your denial of certification to or removal 
of eligibility from a firm, or directed the removal of a firm's 
eligibility, other recipients with whom the firm is certified may 
commence a proceeding to remove the firm's eligibility under 
Sec. 26.87. Such recipients must not remove the firm's eligibility 
absent such a proceeding. Where DOT has reversed your denial of 
certification to or removal of eligibility from a firm, other 
recipients must take the DOT action into account in any certification 
action involving the firm. However, other recipients are not required 
to certify the firm based on the DOT decision.

Subpart F--Compliance and Enforcement


Sec. 26.101  What compliance procedures apply to recipients?

    (a) If you fail to comply with any requirement of this part, you 
may be subject to formal enforcement action under Sec. 26.103 or 
Sec. 26.105 or appropriate program sanctions by the concerned operating 
administration, such as the suspension or termination of Federal funds, 
or refusal to approve projects, grants or contracts until deficiencies 
are remedied. Program sanctions may include, in the case of the FHWA 
program, actions provided for under 23 CFR 1.36; in the case of the FAA 
program, actions consistent with 49 U.S.C. 47106(d), 47111(d), and 
47122; and in the case of the FTA program, any actions permitted under 
49 U.S.C. chapter 53 or applicable FTA program requirements.
    (b) As provided in statute, you will not be subject to compliance 
actions or sanctions for failing to carry out any requirement of this 
part because you have been prevented from complying because a Federal 
court has issued a final order in which the court found that the 
requirement is unconstitutional.


Sec. 26.103  What enforcement actions apply in FHWA and FTA programs?

    The provisions of this section apply to enforcement actions under 
FHWA and FTA programs:
    (a) Noncompliance complaints. Any person who believes that a 
recipient has failed to comply with its obligations under this part may 
file a written complaint with the concerned operating administration's 
Office of Civil Rights. If you want to file a complaint, you must do so 
no later than 180 days after the date of the alleged violation or the 
date on which you learned of a continuing course of conduct in 
violation of this part. In response to your written request, the Office 
of Civil Rights may extend the time for filing in the interest of 
justice, specifying in writing the reason for so doing. The Office of 
Civil Rights may protect the confidentiality of your identity as 
provided in Sec. 26.109(b). Complaints under this part are limited to 
allegations of violation of the provisions of this part.
    (b) Compliance reviews. The concerned operating administration may 
review the recipient's compliance with this part at any time, including 
reviews of paperwork and on-site reviews, as appropriate. The Office of 
Civil Rights may direct the operating administration to initiate a 
compliance review based on complaints received.
    (c) Reasonable cause notice. If it appears, from the investigation 
of a complaint or the results of a compliance review, that you, as a 
recipient, are in noncompliance with this part, the appropriate DOT 
office promptly sends you, return receipt requested, a written notice 
advising you that there is reasonable cause to find you in

[[Page 5145]]

noncompliance. The notice states the reasons for this finding and 
directs you to reply within 30 days concerning whether you wish to 
begin conciliation.
    (d) Conciliation. (1) If you request conciliation, the appropriate 
DOT office shall pursue conciliation for at least 30, but not more than 
120, days from the date of your request. The appropriate DOT office may 
extend the conciliation period for up to 30 days for good cause, 
consistent with applicable statutes.
    (2) If you and the appropriate DOT office sign a conciliation 
agreement, then the matter is regarded as closed and you are regarded 
as being in compliance. The conciliation agreement sets forth the 
measures you have taken or will take to ensure compliance. While a 
conciliation agreement is in effect, you remain eligible for FHWA or 
FTA financial assistance.
    (3) The concerned operating administration shall monitor your 
implementation of the conciliation agreement and ensure that its terms 
are complied with. If you fail to carry out the terms of a conciliation 
agreement, you are in noncompliance.
    (4) If you do not request conciliation, or a conciliation agreement 
is not signed within the time provided in paragraph (d)(1) of this 
section, then enforcement proceedings begin.
    (e) Enforcement actions. (1) Enforcement actions are taken as 
provided in this subpart.
    (2) Applicable findings in enforcement proceedings are binding on 
all DOT offices.


Sec. 26.105  What enforcement actions apply in FAA Programs?

    (a) Compliance with all requirements of this part by airport 
sponsors and other recipients of FAA financial assistance is enforced 
through the procedures of Title 49 of the United States Code, including 
49 U.S.C. 47106(d), 47111(d), and 47122, and regulations implementing 
them.
    (b) The provisions of Sec. 26.103(b) and this section apply to 
enforcement actions in FAA programs.
    (c) Any person who knows of a violation of this part by a recipient 
of FAA funds may file a complaint under 14 CFR part 16 with the Federal 
Aviation Administration Office of Chief Counsel.


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

    (a) If you are a firm that does not meet the eligibility criteria 
of subpart D of this part and that attempts to participate in a DOT-
assisted program as a DBE on the basis of false, fraudulent, or 
deceitful statements or representations or under circumstances 
indicating a serious lack of business integrity or honesty, the 
Department may initiate suspension or debarment proceedings against you 
under 49 CFR part 29.
    (b) If you are a firm that, in order to meet DBE contract goals or 
other DBE program requirements, uses or attempts to use, on the basis 
of false, fraudulent or deceitful statements or representations or 
under circumstances indicating a serious lack of business integrity or 
honesty, another firm that does not meet the eligibility criteria of 
subpart D of this part, the Department may initiate suspension or 
debarment proceedings against you under 49 CFR part 29.
    (c) In a suspension or debarment proceeding brought under paragraph 
(a) or (b) of this section, the concerned operating administration may 
consider the fact that a purported DBE has been certified by a 
recipient. Such certification does not preclude the Department from 
determining that the purported DBE, or another firm that has used or 
attempted to use it to meet DBE goals, should be suspended or debarred.
    (d) The Department may take enforcement action under 49 CFR Part 
31, Program Fraud and Civil Remedies, against any participant in the 
DBE program whose conduct is subject to such action under 49 CFR part 
31.
    (e) The Department may refer to the Department of Justice, for 
prosecution under 18 U.S.C. 1001 or other applicable provisions of law, 
any person who makes a false or fraudulent statement in connection with 
participation of a DBE in any DOT-assisted program or otherwise 
violates applicable Federal statutes.


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

    (a) Availability of records. (1) In responding to requests for 
information concerning any aspect of the DBE program, the Department 
complies with provisions of the Federal Freedom of Information and 
Privacy Acts (5 U.S.C. 552 and 552a). The Department may make available 
to the public any information concerning the DBE program release of 
which is not prohibited by Federal law.
    (2) If you are a recipient, you shall safeguard from disclosure to 
unauthorized persons information that may reasonably be considered as 
confidential business information, consistent with Federal, state, and 
local law.
    (b) Confidentiality of information on complainants. Notwithstanding 
the provisions of paragraph (a) of this section, the identity of 
complainants shall be kept confidential, at their election. If such 
confidentiality will hinder the investigation, proceeding or hearing, 
or result in a denial of appropriate administrative due process to 
other parties, the complainant must be advised for the purpose of 
waiving the privilege. Complainants are advised that, in some 
circumstances, failure to waive the privilege may result in the closure 
of the investigation or dismissal of the proceeding or hearing. FAA 
follows the procedures of 14 CFR part 16 with respect to 
confidentiality of information in complaints.
    (c) Cooperation. All participants in the Department's DBE program 
(including, but not limited to, recipients, DBE firms and applicants 
for DBE certification, complainants and appellants, and contractors 
using DBE firms to meet contract goals) are required to cooperate fully 
and promptly with DOT and recipient compliance reviews, certification 
reviews, investigations, and other requests for information. Failure to 
do so shall be a ground for appropriate action against the party 
involved (e.g., with respect to recipients, a finding of noncompliance; 
with respect to DBE firms, denial of certification or removal of 
eligibility and/or suspension and debarment; with respect to a 
complainant or appellant, dismissal of the complaint or appeal; with 
respect to a contractor which uses DBE firms to meet goals, findings of 
non-responsibility for future contracts and/or suspension and 
debarment).
    (d) Intimidation and retaliation. If you are a recipient, 
contractor, or any other participant in the program, you must not 
intimidate, threaten, coerce, or discriminate against any individual or 
firm for the purpose of interfering with any right or privilege secured 
by this part or because the individual or firm has made a complaint, 
testified, assisted, or participated in any manner in an investigation, 
proceeding, or hearing under this part. If you violate this 
prohibition, you are in noncompliance with this part.

Appendix A to Part 26--Guidance Concerning Good Faith Efforts

    I. When, as a recipient, you establish a contract goal on a DOT-
assisted contract, a bidder must, in order to be responsible and/or 
responsive, make good faith efforts to meet the goal. The bidder can 
meet this requirement in either of two ways. First, the bidder can 
meet the goal, documenting commitments for participation by DBE 
firms sufficient for this purpose. Second, even if it doesn't meet 
the goal, the bidder can document adequate good faith efforts. This 
means that the bidder must show that it took

[[Page 5146]]

all necessary and reasonable steps to achieve a DBE goal or other 
requirement of this part which, by their scope, intensity, and 
appropriateness to the objective, could reasonably be expected to 
obtain sufficient DBE participation, even if they were not fully 
successful.
    II. In any situation in which you have established a contract 
goal, part 26 requires you to use the good faith efforts mechanism 
of this part. As a recipient, it is up to you to make a fair and 
reasonable judgment whether a bidder that did not meet the goal made 
adequate good faith efforts. It is important for you to consider the 
quality, quantity, and intensity of the different kinds of efforts 
that the bidder has made. The efforts employed by the bidder should 
be those that one could reasonably expect a bidder to take if the 
bidder were actively and aggressively trying to obtain DBE 
participation sufficient to meet the DBE contract goal. Mere pro 
forma efforts are not good faith efforts to meet the DBE contract 
requirements. We emphasize, however, that your determination 
concerning the sufficiency of the firm's good faith efforts is a 
judgment call: meeting quantitative formulas is not required.
    III. The Department also strongly cautions you against requiring 
that a bidder meet a contract goal (i.e., obtain a specified amount 
of DBE participation) in order to be awarded a contract, even though 
the bidder makes an adequate good faith efforts showing. This rule 
specifically prohibits you from ignoring bona fide good faith 
efforts.
    IV. The following is a list of types of actions which you should 
consider as part of the bidder's good faith efforts to obtain DBE 
participation. It is not intended to be a mandatory checklist, nor 
is it intended to be exclusive or exhaustive. Other factors or types 
of efforts may be relevant in appropriate cases.
    A. Soliciting through all reasonable and available means (e.g. 
attendance at pre-bid meetings, advertising and/or written notices) 
the interest of all certified DBEs who have the capability to 
perform the work of the contract. The bidder must solicit this 
interest within sufficient time to allow the DBEs to respond to the 
solicitation. The bidder must determine with certainty if the DBEs 
are interested by taking appropriate steps to follow up initial 
solicitations.
    B. Selecting portions of the work to be performed by DBEs in 
order to increase the likelihood that the DBE goals will be 
achieved. This includes, where appropriate, breaking out contract 
work items into economically feasible units to facilitate DBE 
participation, even when the prime contractor might otherwise prefer 
to perform these work items with its own forces.
    C. Providing interested DBEs with adequate information about the 
plans, specifications, and requirements of the contract in a timely 
manner to assist them in responding to a solicitation.
    D. (1) Negotiating in good faith with interested DBEs. It is the 
bidder's responsibility to make a portion of the work available to 
DBE subcontractors and suppliers and to select those portions of the 
work or material needs consistent with the available DBE 
subcontractors and suppliers, so as to facilitate DBE participation. 
Evidence of such negotiation includes the names, addresses, and 
telephone numbers of DBEs that were considered; a description of the 
information provided regarding the plans and specifications for the 
work selected for subcontracting; and evidence as to why additional 
agreements could not be reached for DBEs to perform the work.
    (2) A bidder using good business judgment would consider a 
number of factors in negotiating with subcontractors, including DBE 
subcontractors, and would take a firm's price and capabilities as 
well as contract goals into consideration. However, the fact that 
there may be some additional costs involved in finding and using 
DBEs is not in itself sufficient reason for a bidder's failure to 
meet the contract DBE goal, as long as such costs are reasonable. 
Also, the ability or desire of a prime contractor to perform the 
work of a contract with its own organization does not relieve the 
bidder of the responsibility to make good faith efforts. Prime 
contractors are not, however, required to accept higher quotes from 
DBEs if the price difference is excessive or unreasonable.
    E. Not rejecting DBEs as being unqualified without sound reasons 
based on a thorough investigation of their capabilities. The 
contractor's standing within its industry, membership in specific 
groups, organizations, or associations and political or social 
affiliations (for example union vs. non-union employee status) are 
not legitimate causes for the rejection or non-solicitation of bids 
in the contractor's efforts to meet the project goal.
    F. Making efforts to assist interested DBEs in obtaining 
bonding, lines of credit, or insurance as required by the recipient 
or contractor.
    G. Making efforts to assist interested DBEs in obtaining 
necessary equipment, supplies, materials, or related assistance or 
services.
    H. Effectively using the services of available minority/women 
community organizations; minority/women contractors' groups; local, 
state, and Federal minority/women business assistance offices; and 
other organizations as allowed on a case-by-case basis to provide 
assistance in the recruitment and placement of DBEs.
    V. In determining whether a bidder has made good faith efforts, 
you may take into account the performance of other bidders in 
meeting the contract. For example, when the apparent successful 
bidder fails to meet the contract goal, but others meet it, you may 
reasonably raise the question of whether, with additional reasonable 
efforts, the apparent successful bidder could have met the goal. If 
the apparent successful bidder fails to meet the goal, but meets or 
exceeds the average DBE participation obtained by other bidders, you 
may view this, in conjunction with other factors, as evidence of the 
apparent successful bidder having made good faith efforts.

Appendix B to Part 26--Forms [Reserved]

Appendix C to Part 26--DBE Business Development Program Guidelines

    The purpose of this program element is to further the 
development of DBEs, including but not limited to assisting them to 
move into non-traditional areas of work and/or compete in the 
marketplace outside the DBE program, via the provision of training 
and assistance from the recipient.
    (A) Each firm that participates in a recipient's business 
development program (BDP) program is subject to a program term 
determined by the recipient. The term should consist of two stages; 
a developmental stage and a transitional stage.
    (B) In order for a firm to remain eligible for program 
participation, it must continue to meet all eligibility criteria 
contained in part 26.
    (C) By no later than 6 months of program entry, the participant 
should develop and submit to the recipient a comprehensive business 
plan setting forth the participant's business targets, objectives 
and goals. The participant will not be eligible for program benefits 
until such business plan is submitted and approved by the recipient. 
The approved business plan will constitute the participant's short 
and long term goals and the strategy for developmental growth to the 
point of economic viability in non-traditional areas of work and/or 
work outside the DBE program.
    (D) The business plan should contain at least the following:
    (1) An analysis of market potential, competitive environment and 
other business analyses estimating the program participant's 
prospects for profitable operation during the term of program 
participation and after graduation from the program.
    (2) An analysis of the firm's strengths and weaknesses, with 
particular attention paid to the means of correcting any financial, 
managerial, technical, or labor conditions which could impede the 
participant from receiving contracts other than those in traditional 
areas of DBE participation.
    (3) Specific targets, objectives, and goals for the business 
development of the participant during the next two years, utilizing 
the results of the analysis conducted pursuant to paragraphs (C) and 
(D)(1) of this appendix;
    (4) Estimates of contract awards from the DBE program and from 
other sources which are needed to meet the objectives and goals for 
the years covered by the business plan; and
    (5) Such other information as the recipient may require.
    (E) Each participant should annually review its currently 
approved business plan with the recipient and modify the plan as may 
be appropriate to account for any changes in the firm's structure 
and redefined needs. The currently approved plan should be 
considered the applicable plan for all program purposes until the 
recipient approves in writing a modified plan. The recipient should 
establish an anniversary date for review of the participant's 
business plan and contract forecasts.

[[Page 5147]]

    (F) Each participant should annually forecast in writing its 
need for contract awards for the next program year and the 
succeeding program year during the review of its business plan 
conducted under paragraph (E) of this appendix. Such forecast should 
be included in the participant's business plan. The forecast should 
include:
    (1) The aggregate dollar value of contracts to be sought under 
the DBE program, reflecting compliance with the business plan;
    (2) The aggregate dollar value of contracts to be sought in 
areas other than traditional areas of DBE participation;
    (3) The types of contract opportunities being sought, based on 
the firm's primary line of business; and
    (4) Such other information as may be requested by the recipient 
to aid in providing effective business development assistance to the 
participant.
    (G) Program participation is divided into two stages; (1) a 
developmental stage and (2) a transitional stage. The developmental 
stage is designed to assist participants to overcome their social 
and economic disadvantage by providing such assistance as may be 
necessary and appropriate to enable them to access relevant markets 
and strengthen their financial and managerial skills. The 
transitional stage of program participation follows the 
developmental stage and is designed to assist participants to 
overcome, insofar as practical, their social and economic 
disadvantage and to prepare the participant for leaving the program.
    (H) The length of service in the program term should not be a 
pre-set time frame for either the developmental or transitional 
stages but should be figured on the number of years considered 
necessary in normal progression of achieving the firm's established 
goals and objectives. The setting of such time could be factored on 
such items as, but not limited to, the number of contracts, 
aggregate amount of the contract received, years in business, growth 
potential, etc.
    (I) Beginning in the first year of the transitional stage of 
program participation, each participant should annually submit for 
inclusion in its business plan a transition management plan 
outlining specific steps to promote profitable business operations 
in areas other than traditional areas of DBE participation after 
graduation from the program. The transition management plan should 
be submitted to the recipient at the same time other modifications 
are submitted pursuant to the annual review under paragraph (E) of 
this section. The plan should set forth the same information as 
required under paragraph (F) of steps the participant will take to 
continue its business development after the expiration of its 
program term.
    (J) When a participant is recognized as successfully completing 
the program by substantially achieving the targets, objectives and 
goals set forth in its program term, and has demonstrated the 
ability to compete in the marketplace, its further participation 
within the program may be determined by the recipient.
    (K) In determining whether a concern has substantially achieved 
the goals and objectives of its business plan, the following 
factors, among others, should be considered by the recipient:
    (1) Profitability;
    (2) Sales, including improved ratio of non-traditional contracts 
to traditional-type contracts;
    (3) Net worth, financial ratios, working capital, 
capitalization, access to credit and capital;
    (4) Ability to obtain bonding;
    (5) A positive comparison of the DBE's business and financial 
profile with profiles of non-DBE businesses in the same area or 
similar business category; and
    (6) Good management capacity and capability.
    (L) Upon determination by the recipient that the participant 
should be graduated from the developmental program, the recipient 
should notify the participant in writing of its intent to graduate 
the firm in a letter of notification. The letter of notification 
should set forth findings, based on the facts, for every material 
issue relating to the basis of the program graduation with specific 
reasons for each finding. The letter of notification should also 
provide the participant 45 days from the date of service of the 
letter to submit in writing information that would explain why the 
proposed basis of graduation is not warranted.
    (M) Participation of a DBE firm in the program may be 
discontinued by the recipient prior to expiration of the firm's 
program term for good cause due to the failure of the firm to engage 
in business practices that will promote its competitiveness within a 
reasonable period of time as evidenced by, among other indicators, a 
pattern of inadequate performance or unjustified delinquent 
performance. Also, the recipient can discontinue the participation 
of a firm that does not actively pursue and bid on contracts, and a 
firm that, without justification, regularly fails to respond to 
solicitations in the type of work it is qualified for and in the 
geographical areas where it has indicated availability under its 
approved business plan. The recipient should take such action if 
over a 2-year period a DBE firm exhibits such a pattern.

Appendix D to Part 26--Mentor-Protege Program Guidelines

    (A) The purpose of this program element is to further the 
development of DBEs, including but not limited to assisting them to 
move into non-traditional areas of work and/or compete in the 
marketplace outside the DBE program, via the provision of training 
and assistance from other firms. To operate a mentor-protege 
program, a recipient must obtain the approval of the concerned 
operating administration.
    (B)(1) Any mentor-protege relationship shall be based on a 
written development plan, approved by the recipient, which clearly 
sets forth the objectives of the parties and their respective roles, 
the duration of the arrangement and the services and resources to be 
provided by the mentor to the protege. The formal mentor-protege 
agreement may set a fee schedule to cover the direct and indirect 
cost for such services rendered by the mentor for specific training 
and assistance to the protege through the life of the agreement. 
Services provided by the mentor may be reimbursable under the FTA, 
FHWA, and FAA programs.
    (2) To be eligible for reimbursement, the mentor's services 
provided and associated costs must be directly attributable and 
properly allowable to specific individual contracts. The recipient 
may establish a line item for the mentor to quote the portion of the 
fee schedule expected to be provided during the life of the 
contract. The amount claimed shall be verified by the recipient and 
paid on an incremental basis representing the time the protege is 
working on the contract. The total individual contract figures 
accumulated over the life of the agreement shall not exceed the 
amount stipulated in the original mentor/protege agreement.
    (C) DBEs involved in a mentor-protege agreement must be 
independent business entities which meet the requirements for 
certification as defined in subpart D of this part. A protege firm 
must be certified before it begins participation in a mentor-protege 
arrangement. If the recipient chooses to recognize mentor/protege 
agreements, it should establish formal general program guidelines. 
These guidelines must be submitted to the operating administration 
for approval prior to the recipient executing an individual 
contractor/ subcontractor mentor-protege agreement.

Appendix E to Part 26--Individual Determinations of Social and Economic 
Disadvantage

    The following guidance is adapted, with minor modifications, 
from SBA regulations concerning social and economic disadvantage 
determinations (see 13 CFR 124.103(c) and 124.104).

Social Disadvantage

    I. Socially disadvantaged individuals are those who have been 
subjected to racial or ethnic prejudice or cultural bias within 
American society because of their identities as members of groups 
and without regard to their individual qualities. Social 
disadvantage must stem from circumstances beyond their control. 
Evidence of individual social disadvantage must include the 
following elements:
    (A) At least one objective distinguishing feature that has 
contributed to social disadvantage, such as race, ethnic origin, 
gender, disability, long-term residence in an environment isolated 
from the mainstream of American society, or other similar causes not 
common to individuals who are not socially disadvantaged;
    (B) Personal experiences of substantial and chronic social 
disadvantage in American society, not in other countries; and
    (C) Negative impact on entry into or advancement in the business 
world because of the disadvantage. Recipients will consider any 
relevant evidence in assessing this element. In every case, however, 
recipients will consider education, employment and business history, 
where applicable, to see if the totality of circumstances shows 
disadvantage in entering into or advancing in the business world.

[[Page 5148]]

    (1) Education. Recipients will consider such factors as denial 
of equal access to institutions of higher education and vocational 
training, exclusion from social and professional association with 
students or teachers, denial of educational honors rightfully 
earned, and social patterns or pressures which discouraged the 
individual from pursuing a professional or business education.
    (2) Employment. Recipients will consider such factors as unequal 
treatment in hiring, promotions and other aspects of professional 
advancement, pay and fringe benefits, and other terms and conditions 
of employment; retaliatory or discriminatory behavior by an employer 
or labor union; and social patterns or pressures which have 
channeled the individual into non-professional or non-business 
fields.
    (3) Business history. The recipient will consider such factors 
as unequal access to credit or capital, acquisition of credit or 
capital under commercially unfavorable circumstances, unequal 
treatment in opportunities for government contracts or other work, 
unequal treatment by potential customers and business associates, 
and exclusion from business or professional organizations.
    II. With respect to paragraph I.(A) of this appendix, the 
Department notes that people with disabilities have 
disproportionately low incomes and high rates of unemployment. Many 
physical and attitudinal barriers remain to their full participation 
in education, employment, and business opportunities available to 
the general public. The Americans with Disabilities Act (ADA) was 
passed in recognition of the discrimination faced by people with 
disabilities. It is plausible that many individuals with 
disabilities--especially persons with severe disabilities (e.g., 
significant mobility, vision, or hearing impairments)--may be 
socially and economically disadvantaged.
    III. Under the laws concerning social and economic disadvantage, 
people with disabilities are not a group presumed to be 
disadvantaged. Nevertheless, recipients should look carefully at 
individual showings of disadvantage by individuals with 
disabilities, making a case-by-case judgment about whether such an 
individual meets the criteria of this appendix. As public entities 
subject to Title II of the ADA, recipients must also ensure their 
DBE programs are accessible to individuals with disabilities. For 
example, physical barriers or the lack of application and 
information materials in accessible formats cannot be permitted to 
thwart the access of potential applicants to the certification 
process or other services made available to DBEs and applicants.

Economic Disadvantage

    (A) General. Economically disadvantaged individuals are socially 
disadvantaged individuals whose ability to compete in the free 
enterprise system has been impaired due to diminished capital and 
credit opportunities as compared to others in the same or similar 
line of business who are not socially disadvantaged.
    (B) Submission of narrative and financial information.
    (1) Each individual claiming economic disadvantage must describe 
the conditions which are the basis for the claim in a narrative 
statement, and must submit personal financial information.
    (2) When married, an individual claiming economic disadvantage 
also must submit separate financial information for his or her 
spouse, unless the individual and the spouse are legally separated.
    (C) Factors to be considered. In considering diminished capital 
and credit opportunities, recipients will examine factors relating 
to the personal financial condition of any individual claiming 
disadvantaged status, including personal income for the past two 
years (including bonuses and the value of company stock given in 
lieu of cash), personal net worth, and the fair market value of all 
assets, whether encumbered or not. Recipients will also consider the 
financial condition of the applicant compared to the financial 
profiles of small businesses in the same primary industry 
classification, or, if not available, in similar lines of business, 
which are not owned and controlled by socially and economically 
disadvantaged individuals in evaluating the individual's access to 
credit and capital. The financial profiles that recipients will 
compare include total assets, net sales, pre-tax profit, sales/
working capital ratio, and net worth.
    (D) Transfers within two years.
    (1) Except as set forth in paragraph (D)(2) of this appendix, 
recipients will attribute to an individual claiming disadvantaged 
status any assets which that individual has transferred to an 
immediate family member, or to a trust, a beneficiary of which is an 
immediate family member, for less than fair market value, within two 
years prior to a concern's application for participation in the DBE 
program, unless the individual claiming disadvantaged status can 
demonstrate that the transfer is to or on behalf of an immediate 
family member for that individual's education, medical expenses, or 
some other form of essential support.
    (2) Recipients will not attribute to an individual claiming 
disadvantaged status any assets transferred by that individual to an 
immediate family member that are consistent with the customary 
recognition of special occasions, such as birthdays, graduations, 
anniversaries, and retirements.
    (3) In determining an individual's access to capital and credit, 
recipients may consider any assets that the individual transferred 
within such two-year period described by paragraph (D)(1) of this 
appendix that are not considered in evaluating the individual's 
assets and net worth (e.g., transfers to charities).

[FR Doc. 99-1083 Filed 1-29-99; 11:00 am]
BILLING CODE 4910-62-P