[Federal Register Volume 74, Number 66 (Wednesday, April 8, 2009)]
[Proposed Rules]
[Pages 15904-15910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-7903]



Office of the Secretary

49 CFR Part 26

[Docket No. OST-2009]
RIN 2105-AD75

Disadvantaged Business Enterprise Program; Potential Program 

AGENCY: Office of the Secretary (OST), DOT.

ACTION: Advance notice of proposed rulemaking (ANPRM).


SUMMARY: This advance notice of proposed rulemaking (ANPRM) provides 
interested parties with the opportunity to comment on five matters of 
interest to participants in the Department of Transportation's 
disadvantaged business enterprise (DBE) program. The first concerns 
counting of items obtained by a DBE subcontractor from its prime 
contractor. The second concerns ways of encouraging ``unbundling'' of 
contracts to facilitate participation by small businesses, including 
DBEs. The third is a request for comments on potential improvements to 
the DBE application form, and the fourth asks for suggestions related 
to program oversight. The fifth concerns potential regulatory action to 
facilitate certification for firms seeking to work as DBEs in more than 
one state. The sixth concerns additional limitations on the discretion 
of prime contractors to terminate DBEs for convenience, once the prime 
contractor had committed to using the DBE as part of its showing of 
good faith efforts.

DATES: Comments on this proposed rule must be received by July 7, 2009.

ADDRESSES: You may submit comments (identified by the agency name and 
DOT Docket ID Number OST-2009) by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov and follow the online instructions for submitting 
     Mail: Docket Management Facility: U.S. Department of 
Transportation, 1200 New Jersey Avenue SE., West Building Ground Floor, 
Room W12-140, Washington, DC 20590-0001.
     Hand Delivery or Courier: West Building Ground Floor, Room 
W12-140, 1200 New Jersey Avenue, SE., between 9 a.m. and 5 p.m. ET, 
Monday through Friday, except Federal holidays.
     Fax: 202-493-2251.
    Instructions: You must include the agency name (Office of the 
Secretary, DOT) and Docket number (OST-2009) for this notice at the 
beginning of your comments. You should submit two copies of your 
comments if you submit them by mail or courier. Note that all comments 
received will be posted without change to http://www.regulations.gov 
including any personal information provided and will be available to 
internet users. You may review DOT's complete Privacy Act Statement in 
the Federal Register published on April 11, 2000 (65 FR 19477) or you 
may visit http://DocketsInfo.dot.gov.
    Docket: For internet access to the docket to read background 
documents and comments received, go to http://www.regulations.gov. 
Background documents and comments received may also be viewed at the 
U.S. Department of Transportation, 1200 New Jersey Ave., SE., Docket 
Operations, M-30, West Building Ground Floor, Room W12-140, Washington, 
DC 20590-0001, between 9 a.m. and 5 p.m., Monday through Friday, except 
Federal holidays.

FOR FURTHER INFORMATION CONTACT: Robert C. Ashby, Deputy Assistant 
General Counsel for Regulation and Enforcement, U.S. Department of 
Transportation, 1200 New Jersey Avenue, SE., Washington, DC 20590-0001, 
Room W94-302, 202-366-9310, [email protected].

SUPPLEMENTARY INFORMATION: The Department is holding a series of 
stakeholder meetings to bring together prime contractors, DBEs, and 
state and local government representatives to discuss ways of improving 
administration of the DBE program. As a result of these discussions, 
the Department has issued, and will continue to consider, guidance 
Questions and Answers to help participants better understand and carry 
out their responsibilities. Addressing other issues raised in the 
discussions, however, may require changes to the DBE rules themselves 
(49 CFR Parts 23 and 26). This ANPRM concerns five such issues: (1) 
Counting of DBE credit for items obtained by DBE subcontractors from 
other sources, particularly the prime contractor for whom they are 
working on a given contract; (2) ways of encouraging recipients to 
break up contracts into smaller pieces that can more easily be 
performed by small businesses like DBEs, known as ``unbundling;'' (3) 
potential ways of improving the DBE application and personal net worth 
(PNW) forms; (4) potential ways of improving program oversight, and (5) 
potential ways of reducing burdens on firms seeking certification as 
DBEs in more than one state.

[[Page 15905]]

Counting Credit for Items Obtained by DBEs From Non-DBE Sources

    Section 26.55(a)(1) of the Department's DBE rule provides as 

    (a) When a DBE participates in a contract, you [i.e., the 
recipient] 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 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).

    The preamble discussion of this provision said the following:

    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 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 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. 64 FR5115-
16, February 2, 1999.

    This provision creates an intentional inconsistency between the 
treatment of purchases or leases of items by DBEs from non-DBE sources. 
If a DBE contractor buys or rents items from a non-DBE source other 
than the prime contractor, the recipient counts those items for DBE 
credit on the contract. If a DBE subcontractor buys or rents the same 
items from the prime contractor for the DBE's subcontract, the 
recipient does not award DBE credit for the items.
    The policy rationale for this provision, as the preamble quotation 
notes, is that permitting the prime contractor to provide an item to 
its own DBE subcontractor, and then claim DBE credit for the value of 
that item, raises issues concerning whether the DBE is actually 
independent and performing a CUF. Suppose Prime Contractor A owns an 
asphalt plant and sells asphalt for a highway construction project to 
DBE X. Prime Contractor A then claims the value of the asphalt, which 
its own plant manufactured, for DBE credit. In the Department's view at 
the time the final rule was adopted, the asphalt represented a 
contribution to the project by Prime Contractor A, not DBE X. The rule 
treats the asphalt as material provided by the prime contractor to the 
project and, consequently, not part of the ``work actually performed by 
the DBE.'' Therefore, the rule does not permit it to be counted for DBE 
    In 2007, the Department received a request from the Ohio Department 
of Transportation for a program waiver of this provision. The 
Department's response stated the following reason for denying the 

    In reviewing a waiver request, the key point the Department 
considers is whether granting the request would, in fact, achieve 
the objectives of the DBE regulation. In this case, the Department 
believes that it would be contrary to the rule's objectives for the 
prime contractor to claim DBE credit for the value of its own 
asphalt, just because the asphalt has passed through the hands of 
the DBE subcontractor. The asphalt, in this situation, would not 
represent a contribution to the project by the DBE, but rather part 
of the prime contractor's work on the project.
    Such a result would be contrary to a primary purpose of 49 CFR 
26.55, which is to ensure that DBE credit is given only for the 
contribution to a project that the DBE itself makes. While granting 
the waiver might permit DBE subcontractors, prime contractors, and 
ODOT to report higher DBE participation numbers than would otherwise 
be the case, the reported participation would represent value added 
by the prime contractor/asphalt manufacturer, not the DBE 
subcontractor. Doing so would have the effect of permitting prime 
contractors to meet DBE goals while minimizing the actual 
contributions they need to obtain from DBEs.

    Some prime contractors and DBE contractors have objected to this 
provision, both in correspondence with the Department and in the 
stakeholder meeting discussions. They assert that 26.55(a)(1) prevents 
DBE firms from successfully competing for projects involving the 
purchase of commodities like asphalt, concrete, or quarried rock, since 
the DBE credit they could bring to the project would be limited to the 
installation and labor costs of the job (likely a relatively small 
percentage of the overall contract). This is particularly true, they 
say, when there are only one or two suppliers of the commodity within a 
reasonable distance of the DBE, and those suppliers are owned by or 
affiliated with a prime contractor. Given that there is a growing 
perception that independent suppliers of commodities of this kind are 
being acquired by larger companies, many of whom are prime contractors, 
many stakeholders believe that this scenario is becoming more 
    Participants in the stakeholder meeting discussions also suggested 
that the current rule could also lead to competitive inequities between 
prime contractors. For example, suppose Prime Contractor A has an 
asphalt plant--the only one in the area--and Prime Contractor B does 
not. Both are bidding on a highway construction contract on which there 
is a DBE goal. Prime Contractor A cannot count for DBE credit the 
asphalt that a DBE paving contractor buys, while Prime Contractor B 
can. This makes it easier for B to meet the DBE goal on the contract.
    In thinking about this issue, we have a question about normal 
industry practices on which we invite comment. Suppose, on a project in 
which counting DBE participation is not at issue (e.g., a Federal-aid 
highway contract that has no DBE contract goal, a state-funded project 
to which the DBE program does not apply, a purely private-sector 
contract), a prime contractor has a subcontractor who will be doing 
installation work (e.g., paving, concrete work). If the prime 
contractor has a manufacturing or distribution facility for the 
commodity involved, does the prime contractor commonly sell the 
commodity to the subcontractor, who then is reimbursed by the prime 
contractor for the sale price as part of the subcontract price? 
Alternatively, does the prime contractor typically simply make the 
commodity available on the job site, hiring the subcontractor just to 
do the installation work? What considerations may affect a decision on 
this matter?
    In response to the concerns that have been expressed at the 
stakeholder meetings and elsewhere, the Department is seeking comment 
on four options. All these options focus on the language of the 
regulation. We do not believe that it is possible to make a reasonable 
interpretation of the existing regulation that would change the 
situation about which some DBEs and prime contractors have expressed 
concern. For example, we do not believe that drawing a distinction 
between ``supplies'' and ``materials,'' as some have suggested, is 
viable. In the absence of ``term of art'' definitions of these words in 
the regulation, we rely on their common meanings, which do not differ 
significantly. Moreover, the policy rationale of section 26.55(a)(1) 
referred to above applies equally well to asphalt and other bulk 
commodities, construction equipment, and other items used on a project.
    Option 1: No change. Leave the language of section 26.55(a)(1) as 
it is.
    Option 2: Leave the basic structure of section 26.55(a)(1) intact, 
maintaining the intentional inconsistency between items provided to a 
DBE by the prime contractor on a given project and items provided by 
another non-DBE source. However, permit recipients to make exceptions 
based on criteria stated in an

[[Page 15906]]

amendment to the rule. The exceptions would allow counting of items 
provided by a prime contractor to its DBE subcontractor under limited 
circumstances. For example, one criterion for granting an exception 
might be the absence of sources for an item in a given geographic area 
other than a prime contractor bidding on a project. Another might be a 
determination by the recipient that allowing items provided by a prime 
contractor to count for DBE credit is necessary to ensure fair 
competition among prime contractors. The Department seeks comment on 
what criteria the Department should propose if we pursue this option, 
as well as what procedures an amended rule should provide for 
recipients' exception processes.
    Option 3: Amend the rule to permit items obtained by DBEs for a 
contract to be counted for DBE credit regardless of their non-DBE 
source. This option would eliminate the current intentional 
inconsistency by permitting items obtained by a DBE from its prime 
contractor to count for DBE credit in the same manner as items obtained 
from other non-DBE sources. This approach would satisfy the objections 
of some DBEs and prime contractors to the existing counting provision. 
It would result in a level competitive playing field among prime 
contractors and among DBEs. It would probably lead to higher reported 
DBE participation but it would, to some extent, undermine the principle 
that only the portion of a contract actually attributable to a DBE's 
own work should be counted for DBE credit.
    Option 4: Amend the rule to prohibit items obtained by a DBE from 
any non-DBE source to be counted for DBE credit. This option would 
eliminate the current intentional inconsistency by saying that if a DBE 
obtains items from any non-DBE source, whether the prime contractor or 
a third party, those items cannot be counted for DBE credit. This 
approach would result in counting DBE credit in all situations in a way 
such that only work actually performed by DBEs would result in credit. 
It would result in a level competitive playing field among prime 
contractors and among DBEs, but it would probably result in recipients 
having to set lower DBE goals on some kinds of contracts and to report 
lower DBE participation numbers.
    One concern mentioned in the stakeholder meeting discussion of this 
issue is that being able to report higher total contract dollars--even 
if based, in part, on items provided by prime contractors or other non-
DBE sources--could be beneficial to DBEs. This was said to be the case 
because, in effect, it looked good on the resume of a DBE to say that 
it had completed a relatively large project. Doing so could make it 
easier for the DBE to grow and build capacity by being able to bid on 
larger contracts in the future, get larger bonds, etc. The Department 
seeks comment on how real and important this factor may be, and whether 
it is a consideration the Department should treat as significant in 
determining which option to pursue on this issue.
    In responding to this ANPRM, we invite interested persons to 
comment on these four options, how the Department could best structure 
whichever option it chooses, as well as any other options that 
commenters think may have merit.

Contract Unbundling

    For as long as there have been programs designed to assist small or 
disadvantaged businesses in obtaining government contracts, 
``unbundling'' has been mentioned as a desirable way of enhancing 
business opportunities for these businesses. The Small Business 
Reauthorization Act of 1997 defines contract bundling as '' 
consolidating two or more procurement requirements for goods or 
services previously provided or performed under separate, smaller 
contracts into a solicitation of offers for a single contract that is 
unlikely to be suitable for award to a small business concern.'' By 
``unbundling,'' we mean breaking up large contracts into smaller pieces 
that small businesses will find it easier to compete for and perform, 
as well as structuring contracting requirements to ease competition for 
small firms. Unbundling contracts is cited in the DOT DBE regulation 
(section 26.51(b)(1)) as one of the race-neutral measures that 
recipients can take to help meet overall DBE goals.
    In the DBE program, as in direct Federal procurement, unbundling 
historically has been easier to praise than to implement. The reasons 
why are not hard to understand. Contracting agencies often believe, 
with some justification, that it is more economically efficient to 
issue one large contract than to issue a series of smaller contracts. 
Doing so may also reduce the administrative burdens of the procurement 
process. In this ANPRM, the Department is seeking comment on what 
steps--beyond using its bully pulpit to advocate greater use of the 
technique--the Department might take to foster unbundling.
    For example, would it be useful to add to Part 26 a requirement 
that recipients' DBE programs include specific policies and procedures 
to unbundle contracts of a certain size that are subject to DBE program 
requirements? In all design-build contracts, or other types of large 
contracts involving a master or central prime contractor, should there 
be requirements that the prime contractor ensure that some subcontracts 
are structured to facilitate small business participation? When a 
recipient is letting a race-neutral contract (that is, one without a 
DBE contract goal), should the terms of the solicitation call on the 
prime contractor to provide for enough small subcontracts to make it 
possible for small businesses, including DBEs, to participate more 
readily? When a recipient has a significant race-neutral component of 
its overall goal, should the recipient be required to ensure that some 
portion of the contracts that it issues are sized to facilitate small 
business participation? Should recipients include, as an element in 
their DBE programs, procedures to facilitate cooperation among small 
and disadvantaged businesses to enable them to better compete for 
larger contracts (e.g., formation of joint ventures among DBEs)?
    The Federal Acquisition Regulations (FARs) have procedures and 
criteria related to unbundling in direct Federal procurement. Do any of 
the FAR provisions suggest useful ways of approaching unbundling issues 
in the DBE program?
    The Department seeks comment on whether any of these ideas have 
merit, as well as any other suggestions that interested persons may 
have to make contracts more accessible to small and disadvantaged 
businesses. It would be useful for the Department to receive 
information on ``best practices'' that recipients have successfully 
implemented to make contracts more accessible to small businesses.

Revised DBE Certification Application and Personal Net Worth Statement

    Under Sec.  26.83(c)(7) of the Regulation, firms applying for DBE 
certification must use the uniform certification application form 
provided in Appendix F without change or revision. The application is 
intended to provide sufficient details concerning a firm so that 
recipients can determine whether the applicant firm is eligible for the 
program. Entries are provided to capture details concerning the firm's 
origination; control by the disadvantaged owners; involvement by 
directors, employees, and other companies in the firm's affairs; and 
financial/equipment arrangements. Recipients are permitted (with 
approval from the concerned Operating

[[Page 15907]]

Administration) to supplement the form by requesting additional 
    The Department takes the uniformity requirement seriously. We have 
heard numerous complaints from DBEs that application materials may 
differ widely from state to state. We emphasize that all UCPs must use 
the same, identical DOT form, without change or addition except as 
specifically approved by an Operating Administration.
    We seek comment on what changes to the current application form 
(Appendix F) could be made to provide a more comprehensive 
understanding of the business structure and operation of the applicant 
firm. In particular, what items could be added, revised or eliminated 
so that recipients can obtain the information they need to adequately 
assess an applicant's eligibility? We note that several pieces of new 
information placed on the application could be potentially useful for 
determining owners' economic disadvantage and their ability to control 
their business. For example, an applicant's date of birth would assist 
in determining a proper value for retirement assets under Sec.  
26.67(a)(2)(iii)(D), which accounts for assets that cannot be 
distributed to an individual without significant adverse tax 
consequences. Under Internal Revenue Service guidelines, a person's age 
is relevant when making such a calculation; yet the application and tax 
material submitted in connection with a DBE certification application 
does not contain the applicant's date of birth.
    Questions 11 and 12 (found in Section 4 ``Control'') request 
information on the firm's management personnel who may perform a 
management or supervisory function for another business, or own or work 
for any other firms that have a relationship with the applicant firm. 
As written, these questions may not capture other types of employment 
or activities that persons may be commonly engaged in outside their 
role with the applicant firm. We believe that the outside activities of 
a firm's owner(s) and key personnel are highly relevant in determining 
who at the firm controls each activity for which the firm is seeking 
certification. If an owner is absent from the firm and performs work 
(paid or unpaid) elsewhere, this could have an impact on the firm's 
eligibility. While such information is commonly placed on 
r[eacute]sum[eacute]s submitted with the application or obtained during 
an on-site visit, this is not always the case. Also, not every key 
person submits his or her r[eacute]sum[eacute] and it may be difficult 
to determine the number of hours devoted to firm activities. Should the 
application include more details concerning owners' outside employment 
or other business dealings to include a description of the time spent 
at these operations and an explanation of how these activities do not 
conflict with their ability to manage the applicant firm?
    A related omission is found in Section 3, Part B, Question 4, which 
asks for owner's ``familial relationship to other owners.'' This entry 
does not include an owner's familial relationship to other employees at 
the firm, any one of whom may have financed the operation or control 
key aspects of the firm's work. This type of information would not be 
obtained without probing further during an on-site visit. What items 
could be added to the certification application that would clarify the 
roles of the firm's owners and key individuals? What items are missing 
from the form that are routinely asked during the on-site visit? On 
such item is the firm's NAICS Code. While an entry exists in Section 2 
for a description of the firm's primary activities, it seems necessary 
for certification purposes for the firm and a recipient to determine 
which NAICS Codes are applicable. We invite interested persons to 
comment on these issues and provide suggestions for changes to the 
certification application form.
    The foregoing paragraphs have asked for comment on clarifications 
or additions to the existing application form. The Department has also 
heard concerns that the form, as currently structured, is too long and 
complex, to the point of deterring firms from applying for DBE 
certification. The Department seeks comment on whether there are ways 
of significantly shortening or simplifying the form that would continue 
to give UCPs sufficient information to make informed decisions about 
firms' eligibility. If commenters have a model of an alternative form 
in mind, it would be helpful if they would provide a draft copy with 
their comments.
    We also invite comments on an appropriate personal net worth form 
to be used by each applicant owner claiming to be socially and 
economically disadvantaged. The current certification application 
allows applicants to submit their own version of a personal net worth 
statement, and the Small Business Administration's ``personal financial 
statement'' (Form 413) is most commonly used. SBA's form is tailored to 
its program and the form's headnote asks for completion of the 
statement by each proprietor, or limited partner with 20 percent or 
more interest and each general partner; or each stockholder holding 20 
percent or more of voting stock; or any person or entity providing a 
guaranty on the loan. This varies significantly from the DBE program 
and has caused confusion, as Part 26 requires that only disadvantaged 
owners claiming ownership of 51 percent of the firm (or a combination 
of disadvantaged owners holding a majority interest) submit a personal 
net worth statement. Confusion also stems from the nature of the 
entries to be completed by the applicant, which are missing information 
that recipients find useful in verifying the calculation of assets and 
liabilities. This is particularly the case in the listing of ``real 
estate owned,'' as the form does not allow easy entry of multiple 
owners, their relative share of any mortgages, any home equity/
secondary loan amounts, and other items.
    Should Part 26 specify in greater detail what types of information 
should be included on an applicant's personal net worth statement and 
what attachments should accompany the statement? What instructions can 
be placed on the application to alert owners (and recipients) that all 
assets are relevant to determining a person's overall net worth? 
Instructions could specify that items often overlooked or 
mischaracterized as a joint asset (such as individual retirement 
accounts, which are never jointly held, or Medical Savings Accounts) 
should be included on the statement. In addition, how can owners 
adequately explain whether new assets were purchased with dividends or 
capital gains that are reported in a tax return, but not reflected on 
the personal net worth statement? What transactional details such as 
these should we require applicants to report? Are there financial 
documents not necessarily related to a person's net worth that are 
missing but could be relevant to other aspects of the rule, such as W-2 
``Wage and Tax'' statements showing remuneration of owners and 
    We are aware that an expanded form may have the unintended 
consequence of adding to the paperwork performed by firms and the 
length of the overall information gathering process, two issues that we 
hope commenters will also address. As with the application form, the 
Department seeks comment on whether there are ways of significantly 
shortening or simplifying the form that would continue to give UCPs 
sufficient information to make informed decisions about applicants' 
PNW. If commenters have a model of an alternative form in mind, it 
would be helpful if they would provide a draft copy with their 
    The Department also believes strongly that PNW is not the only 
factor that recipients should consider in

[[Page 15908]]

determining whether an applicant is economically disadvantaged. As the 
Department has said in guidance, there may be situations in which the 
overall financial situation of an applicant can reasonably suggest that 
the applicant is not economically disadvantaged, even when his or her 
PNW falls under the $750,000 cap. For example, if an individual owns a 
$15 million house with a $14.5 million mortgage, or has numerous 
vacation properties, or an expensive yacht or horse breeding farm, or 
lives with family members whose evident wealth is quite high, a UCP 
might reasonably conclude that he or she is not economically 
disadvantaged even though he or she may meet the PNW requirements of 
the rule. The Department seeks comment on how best to apply and 
describe the economic disadvantage concept in its rules.

Program Oversight

    Two stated objectives of the DBE program are to create a level 
playing field on which DBEs can compete fairly for DOT-assisted 
contracts and to ensure that only firms that fully meet the eligibility 
standards are permitted to participate as DBEs. Unfortunately, these 
objectives have at times been thwarted by DBE program fraud, fronts/
pass-throughs, and other nefarious schemes, which have been subjects of 
great concern to the Department. In 2004, the Secretary of 
Transportation established a senior-level working group to develop and 
implement strategies for enhanced compliance, enforcement, and 
oversight of the DBE program. Combating DBE fraud has become a major 
emphasis area for the Department's Office of the Inspector General.
    While effort at the Federal level is very important, fraud 
prevention begins at the state and local level. We seek comment on 
amending the regulation to require recipients to take a more hands-on 
approach to overseeing the program. The precise nature of what this 
entails is the subject of this portion of our request for information 
and we seek input on what revisions could increase the integrity of the 
program and what best practices exist that recipients could emulate. 
This includes specific language that could be added to address (1) 
conflicts of interest within a recipient's certification unit or UCP, 
(2) general standards and guidance for reviewing their DBE program, (3) 
the independence and competence of certifiers in the process, and (4) 
objective and impartial judgment on all issues associated with the DBE 
program. If additional language would be too cumbersome, are there 
different measures that would achieve this same result?

Facilitating Interstate Certification

    The DBE program is a national program, and many firms are 
interested in working in more than one state. However, certification 
proceeds on a state-by-state basis, with each state's UCP operating 
independently. In the stakeholder meetings and other forums, DBEs and 
prime contractors have frequently expressed frustration at what they 
view as unnecessary obstacles to certification by one state of firms 
located in other states. They complain of unnecessarily repetitive, 
duplicative, and burdensome administrative processes and what they see 
as the inconsistent interpretation of the DOT rules by various UCPs. 
There have been a number of requests for nationwide reciprocity or some 
other system in which one certification was sufficient throughout the 
    The Department believes that more should be done to facilitate 
interstate certification. Interstate reciprocity has always been 
authorized under Part 26 (see section 26.81(e) and (f)), and in 1999 we 
issued a Q&A encouraging this approach. To further encourage such 
efforts, the Department issued a Q&A in 2008, providing the following 

SBA? (Posted--6/18/08)

    * It is the policy of the Department of Transportation that 
unified certification programs (UCPs) should, to the maximum extent 
feasible, reduce burdens on firms which are certified as DBEs in 
their home state and which seek certification in other states. 
Unnecessary barriers to certification across the country are 
contrary to the purpose of a national program like the DBE/ACDBE 
    * In particular, recipients and UCPs should not unnecessarily 
require the preparation of duplicative certification application 
    * We remind recipients and UCPs that the Uniform Certification 
Application Form in Appendix F to part 26 MUST be used for all 
certifications. The rules do not permit anyone to alter this form or 
to use a different form for DBE certification purposes.
    * The Department strongly encourages the formation of regional 
certification consortia, in which UCPs in one state provide 
reciprocal certification to firms certified by other members of the 
consortium. Consortium members should meet and/or speak with each 
other frequently to discuss eligibility concerns and approaches to 
common issues, to conduct training, and for other purposes. 
Generally, these consortia should be established among states that 
are located in proximity to one another.
    * The Department will closely monitor the efforts of UCPs to 
reduce burdens on firms applying for certification outside their 
home states. The Department will determine at a later time whether 
additional regulatory action is appropriate to prevent unnecessary 
certification burdens.

Certifications From Other States

    * For situations in which a firm certified in State A applies 
for certification in State B, we suggest the following model. Other 
approaches are also possible, but the Department believes strongly 
that all states should put into place procedures to avoid having 
firms certified in one state start the application process from 
scratch in another state.
    + Request that the applicant provide a copy of the full and 
complete application package on the basis of which State A certified 
the firm. State B should require an affidavit from the firm stating, 
under penalty of perjury, that the documentation is identical to 
that provided to State A. It is important that all this material be 
legible, so that State B can review the package as if it were the 
    + To ensure that information is reasonably contemporary, State B 
could have a provision limiting this expedited process to 
application packages filed with State A within three years of the 
application to State B.
    + State B should instruct the applicant to provide any updates 
needed to make the application material current (e.g., changes in 
personal net worth of the owner, more recent tax returns, changes 
affecting ownership and control).
    + State B should request State A's on-site review report and any 
accompanying memoranda or evaluations. State A should promptly 
provide this material.
    + State B should certify the firm unless changes in 
circumstances or facts not available to State A justify a different 
result, or unless State B can articulate a strong reason for coming 
to a different result from State A on the same facts.

    The Department is aware that in one case, Virginia, Maryland, and 
the District of Columbia have created a ``reciprocity'' agreement with 
respect to DBE certification, though it does not have the ``rebuttable 
presumption of eligbility'' feature suggested in the Department's Q&A. 
That is a feature we regard as a key part of an effective interstate 
certification system. Otherwise, we are not aware of much activity to 
facilitate interstate certifications and thereby mitigate the problems 
of which DBEs have spoken. UCP representatives have been very candid in 
saying that a lack of trust among various state UCPs and a concern 
about the perceived uneven quality of certifications are obstacles to 
such action.
    Another obstacle to effective interstate certification, and to 
effective oversight of certified firms generally, is the apparent age 
of many on-site review reports. A firm may be certified in State

[[Page 15909]]

A in Year 1, with no update of the on-site review for many years 
thereafter. When the firm applies to State B eight years later, State B 
does not have a reasonably recent on-site review report to use in 
determining whether the firm is eligible. Even State A does not have 
recent information to rely upon in determining whether the firm remains 
eligible. The Department seeks comment on whether it would make sense 
to require an update of each on-site review report at certain 
intervals, such as every three or five years. The Department also seeks 
comment on the impact of such a requirement on UCP resources.
    The Department seeks comment on whether we should propose a 
regulatory requirement along the lines of the idea suggested in the Q&A 
to begin to surmount the obstacles to facilitating interstate 
certification. We also welcome ideas about other potential approaches 
to the issue.
    Over the years, interested persons have raised the idea of either 
nationwide certification reciprocity or Federalizing the certification 
process. Nationwide reciprocity raises concerns about firms engaging in 
forum shopping to find the ``easy graders'' among certifying agencies. 
Federalizing certification, such as having a unitary certification 
system operated by DOT, may raise significant resource issues. Such an 
approach could also result in less local ``on the ground'' knowledge of 
the circumstances of applicant firms, which can be a valuable part of 
the certification process. The Department seeks comment on how, if at 
all, these issues could be addressed, and whether there is merit in one 
or another nationwide approach to certification.

Terminations for Convenience and Substitution

    Currently, section 26.53(f)(1) tells recipients to

    * * * 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.

    Under section 26.53(f)(2),

    When a DBE subcontractor is terminated, or fails to complete its 
work on the contract for any reason, you [the recipient] must 
require the prime contractor to make good faith efforts 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 

    In recent years, participants in the DBE program have informally 
told the Department of what they, and DOT staff, regard as a growing 
problem. For example, a prime contractor accepts DBE Firm A and lists 
it as the firm that will meet its DBE contract goal. Firm A expends 
time, effort, and money to prepare to perform the contract, after 
signing a letter of intent with the prime contractor. Then, after 
contract award or execution, the prime terminates Firm A for 
convenience and substitutes DBE Firm B, whose participation is 
sufficient to meet the goal.
    There could be various reasons for such an action. For example, the 
prime may have been able to negotiate a lower price with Firm B, or the 
prime has an established relationship with Firm B, and Firm B has just 
become available to perform the work. In any case, Firm A is left out 
in the cold. Because the prime contractor did not terminate Firm A for 
convenience and then perform the work itself, the recipient did not, 
under section 26.53(f)(1), have to sign off on the substitution. 
Because the substitute firm is itself a DBE, the prime contractor met 
its good faith efforts obligation under section 26.53(f)(2).
    We are also aware of another concern. Suppose DBE Firm C is 
performing a subcontract (e.g., in paving). The recipient issues a 
change order, resulting in a significant increment in the paving work 
to be done on the contract. The prime contractor, rather than assigning 
this additional work to Firm C, either does the work itself or assigns 
it to another DBE or non-DBE subcontractor. In this situation, Firm C, 
which is already on the job, and on which the prime contractor relied 
for its original DBE goal achievement, is denied the opportunity for 
additional work and profit.
    The Department is seeking comment on whether we should modify 
section 26.53 to provide greater involvement by recipients in these 
situations. For example, we could propose that, when a prime contractor 
has relied on a commitment to a DBE firm to meet all or part of a 
contract goal, the prime contractor could not terminate the DBE firm 
for convenience without the recipient's written approval, based upon a 
finding of good cause for the termination. This would be true whether 
the prime contractor proposed to replace the DBE's participation with 
another DBE subcontractor, a non-DBE subcontractor, or with the prime 
contractor's own forces. Likewise, we might propose amending section 
26.53 to require the recipient to approve a decision by a prime 
contractor to give a significant increment in the work (e.g., as the 
result of a change order) assigned to a DBE subcontractor on which the 
prime contractor had relied to meet all or part of its contract goal to 
any party other than that DBE subcontractor. The purpose of these ideas 
would be to make more meaningful the commitment to a particular DBE 
firm that the prime contractor made as part of the contract award 
process. We also seek comment on adding a similar requirement for pre-
award substitutions in the case of negotiated procurements.
    The concept on which we are seeking comment would concern 
situations where there is a contract goal in a solicitation for the 
contract. We do not now contemplate proposing such a provision with 
respect to race-neutral contracts, in which there was not a contract 
goal. However, we do seek comments on whether a concept of this kind 
should apply to race-neutral contracts. We also seek comment on whether 
we should propose any criteria for recipients to apply in deciding 
whether to approve a substitution, and on what such criteria might be.

Regulatory Analyses and Notices

    This ANPRM is a nonsignificant rule under Executive order 12886, 
because any notice of proposed rulemaking resulting from it will not 
impose significant costs or burdens on regulated parties. Nor will an 
NPRM that may follow this ANPRM have significant economic effects on a 
substantial number of small entities. While the DBE program focuses on 
small entities, the ANPRM seeks comment on measures that would have the 
effect of reducing administrative burdens on small entities. At the 
time of the NPRM, the Department will determine whether it is necessary 
to conduct a Regulatory Flexibility Analysis.
    This ANPRM does not include information collection requirements 
subject to the Paperwork Reduction Act. The Department does not 
anticipate effects on state and local governments sufficient to invoke 
requirements under the Federalism Executive Order. Because it is based 
on civil rights statutes, this rulemaking is not subject to the 
Unfunded Mandates Act.
    The Department seeks comment on any issues related to the 
application of these or other cross-cutting regulatory process 
requirements to rulemaking on the aspects of the DBE program covered by 
this ANPRM.

[[Page 15910]]

    Issued this 25th day of March 2009, at Washington, DC.
Ray LaHood,
Secretary of Transportation.
 [FR Doc. E9-7903 Filed 4-7-09; 8:45 am]