In January 2011, the Department of Transportation announced new changes to the Disadvantaged Business Enterprise Program that would make it easier for DBE firms to get certified in other states.  Those new rules became effective on January 1, 2012.

If you are a certified DBE in your home state (“State A”)and seek certification in another state (“State B”) you must provide State B with a copy of your certification notice from State A. According to the new regulation, your certification notice from State A should be sufficient to allow State B to certify your firm.

However, we have already observed that certain states are requiring more information from applicants. This is because the new rule also provides a second method for interstate certification which is considerably more burdensome for applicants. Specifically, the new rule states that “in any situation in which State B chooses not to accept State A’s certification”
applicants must provide the following required information (“Required Information”):

(1) You must provide to State B a complete copy of the application form, all supporting documents, and any other information you have submitted to State A or any other state related to your firm’s certification. This includes affidavits of no change and any notices of changes that you have submitted to State A, as well as any correspondence you have had with State A’s  Unified Certification Program or any other recipient concerning your application or status as a DBE firm.

(2) You must also provide to State B any notices or correspondence from states other than State A relating to your status as an
applicant or certified DBE in those states. For example, if you have been denied certification or decertified in State C, or subject to a decertification action there, you must inform State B of this fact and provide all documentation concerning this action to State B.

(3) If you have filed a certification appeal with DOT, you must inform State B of the fact and provide your letter of appeal and DOT’s response to State B.

(4) You must submit 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.

Essentially, the new rule requires applicants to provide State B with their entire DBE Application and correspondence from State A as well as any correspondence from any other state in which the firm is certified.  Once an applicant submits all of this information, State B has 60 days to decide whether to certify the firm or determine that “good cause” exists not to grant
certification. The new regulation provides the following reasons for determining that good cause exists:

(i) Evidence that State A’s certification was obtained by fraud;

(ii) New information, not available to State A at the time of its certification, showing that the firm does not meet all eligibility
criteria;

(iii) State A’s certification was factually erroneous or was inconsistent with the requirements of this part;

(iv) The State law of State B requires a result different from that of the State law of State A.

(v) The information provided by the applicant firm did not meet the requirements of regulation (i.e. the Required Information
discussed above).

If State B determines that good cause exists not to certify they applicant, they must notify the applicant in writing and provide specific reasons why the applicant could not be certified in State B. The applicant may respond to the denial letter by requesting an in-person  meeting with a decision maker at State B. The meeting must take place within 30 days of the applicant’s request. If after the meeting the applicant are still denied certification, the applicant may appeal the denial decision to the Department of Transportation.

Although the new interstate certification regulations are  a welcome move towards a more national program, it is very likely, at least in the near future, that the implementation of the new regulation will problematic. As mentioned above, although the new regulation allows certifying agencies to accept certifications from firm’s home states, most agencies will probably not choose that method. Rather they will require firms to provide all of the Required Information as provided in the regulation. This may unduly burden applicants.

In addition, many agencies already have considerable difficulty in meeting the 90 day requirement for certifying new applicants. Under the new regulation, agencies have only 60 days to review interstate applications and 30 days to schedule an in person meeting if an applicant who has been denied requests such a meeting. Depending on the volume applications, the process may become very cumbersome in some states and lead to improperly denied applications and delay. The most disconcerting aspect of the new regulation is that firms denied interstate certification must be entered into the Department of Transportation Office of
Civil Rights’ (“DOCR”) Ineligibility Determination Online Database. Entry into this database could serve as the basis for decertification procedures in a firm’s home state or be the basis for a future bid protest.

At Kleiner & Cazeau, we have considerable experience in representing clients seeking interstate DBE certifications. Although the new regulations are a welcome step towards a national DBE certification, we believe that the in the near future there will be difficulties as state UCP’s try to navigate the new rule. Do not let your firm become negatively impacted my agencies that don’t understand the new regulations. Call us to assist you in obtaining your interstate DBE certification at (305) 517-1392 ext 102.

In order to apply for certification as a Disadvantaged Business Enterprise (DBE), your firm must meet the following eligibility criteria stated in 49 CFR Part 26:

• The disadvantaged individual must be a U.S. citizen (or resident alien) and be a member of a socially or economically disadvantaged group:

a. African American

b. Hispanic American

c. Native American

d. Asian-Pacific American

e. Subcontinent-Asian American

f. Woman

g. Others certified as disadvantaged (an individual who is not a member of the groups listed above can still be certified as a DBE  by establishing their socially  disadvantaged status).

• The disadvantaged individual must have a personal net-worth (PNW) of less than $1,320,000. Items excluded from a person’s net worth calculation include an individual’s ownership interest in the applicant firm, and his or her equity in their primary residence.
• Depending upon the nature of work performed, a firm (including its affiliates) must not have average annual gross receipts over the firm’s previous three fiscal years in excess of $22,410,000 ($52,470,000 for airport concessionaires in general with some exceptions). This size standard is for construction related work. Depending on the type of work the business performs, other lower size standards may apply.
• The firm must be a for-profit small business where socially and economically disadvantaged DBE owner(s) own at least a 51% interest, and have managerial and operational control of the business operations; the firm must not be tied to another firm in such a way as to compromise its independence and control.
• The socially and economically DBE owner(s) must possess the power to direct or cause the direction to 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.
• 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. (This rule varies from state to state. For example, if your state allows someone else to qualify your business then you should be able to certify your firm without possessing the particular license or credential on your own.

At Kleiner & Cazeau we are prepared to assist eligible firms in obtaining DBE certification, appealing certification denials, defending eligible firms in bid protests or initiating bid protests against firms not eligible to participate in the program. If you are interested in obtaining DBE certification or have questions or concerns about the program please call us at (305) 517-1392 ext 102.

The DBE application review process

Clients are often surprised when the DBE application they prepared themselves comes back denied. Often, denials can be prevented by understanding the DBE application process and what information is being reviewed and how that information will be used. Understand that there may be actions that you take as a business owner that, while good for business, may hurt you chances of getting DBE application approved.

The rules governing the DBE program place a burden on participants in the program to ensure that only socially and economically disadvantaged individuals take advantage of the program. Therefore, the primary objective of the DBE application review process is to determine whether a socially and economically disadvantaged individual, independently owns and controls the company.

The review of your DBE Application

The individual reviewing your dbe application must not only review your dbe application but dozens, if not hundreds of other dbe applications. The only way to perform this daunting task is to utilize checklists. For the most part, reviewers try very hard to maintain objectivity and not draw conclusions during the file review. However, reviewers are not necessarily attorneys or CPAs so complex business and financial arrangements that fall outside of the checklist can cause problems.

After receiving the dbe application packet, the information contained is reviewed and compared against a checklist. Particular attention is given to names appearing in the documents, since the same names may appear in different documents. Same names in different documents may indicate a relationship that affects the DBE applicant’s control over the company.

Conflicting information raises questions that may be addressed at the on-site review.  Comparing changes in financial position may provide an insight into problem areas dealing with managerial control.

Reviewers will often create flow charts to track organizational changes and/or where the firm is connected with other firms by means of interlocking directors and/or officers.

Tracing dates through the dbe application is also an often used review technique. Conflicting dates and conflicting information can also raise questions at the on-site interview.

Information related to your dbe application that the reviewer considers:

1. The firm must be a small business concern as defined by the Small Business Act and relevant regulations. The reviewer will seek to determine whether your firm is a “small business” as defined by the SBA.  For general contractors the limit is average annual gross receipts over $17,420,000 over the prior three fiscal years. For engineering firms the limit is $4 million and for specialty contractors the limit is $7.5 million.

2. The majority (51% or greater) owner(s) must be socially disadvantaged. This means:

a. African American

b. Hispanic American

c. Native American

d. Asian-Pacific American

e. Subcontinent-Asian American

f. Woman

g. Others certified as disadvantaged

3. The majority (51% or greater) owner(s) must be economically disadvantaged. This means a personal net worth of less than $750,000 (this was recently changed $1.3 million to adjust for inflation), excluding equity in one personal residence and the value of the DBE firm ownership.

4. Control: The reviewer will closely scrutinize the applicant firm whose ownership or control has recently changed. True control of the firm by the disadvantaged owner is critical to the certification process. Business entity control is divided into two segments:

a. Operational Control: The disadvantaged owner must be actively involved in all aspects of the business. The individual must show that basic decisions pertaining to the daily operations are made independently.     The    individuals seeking certification must demonstrate experience and technical competence in the field in which certification is sought. Firms that utilize a qualifier who is not the socially and economically disadvantaged owner need to pay particular attention to this requirement.

b. Managerial Control: The disadvantaged owner must have demonstrated ability to  make independent and unilateral business decisions to guide the future and destiny of the business.

5. Financial Data: All financial items will be systematically reviewed and analyzed to determine the control of a business.

a. Company Financial Statement: A careful review of the financial statements will be used to determine possible intercompany transactions or loans/or loans payable which dilute the  applicant’s effectiveness in controlling the business.

1.) The Balance Sheet shows:

a.) Equipment account

b.) Accounts payable

c.) Notes payable

d.) Capital stock account

e.) Notes and loans receivable from officers or stockholders

f.) Notes and loans payable to officers and stockholders

g.) Equipment loans

h.) Accrued expenses

2.) Footnotes to the statements  will be critically reviewed.

3.) Statement of changes in financial position

4.) The Income Statement shows:

a.) Payments to subcontractors

b.) Rent expense

c.) Lease expense

d.) Salaries

b. Licenses To Do Business: These are needed as proof that the applicant can legally do business in the state. The review will look at:

1.) Type of licenses.

2.) Dates that licenses expire.

3.) Who holds the license?

c. Prior Two Years Federal Tax Returns: These documents will be used to compare information reported on the financial statements such as:

1.) Salaries paid to officers.

2.) Names of officers and amount of stock ownership.

3.) Dividends paid.

d. Resumes’ of Applicant: Resumes indicate the applicant’s experience in a particular field of work. They can indicate the applicant’s technical competence based on experience in the industry and the degree of operational and managerial control exercised by the principals. Reviewers will look for: 1.) Previous employers, common to two or more principals of the company.

2.) Present occupation.

3.) Previous employers who subcontract work to or from the applicant’s company.

e. Third-Party Agreements: Rent and lease agreements are reviewed to determine if the applicant’s control of the company is limited and affected by a third party. Items of importance are:

1.) What is the purpose of the agreement?

2.) Who are the parties to the agreement?

3.) What are the terms of the agreement?

4.) Who benefits by the terms of the agreement?

5.)  Does the agreement contain any language or conditions that restrict the applicant’s power to control the destiny of the company?

The above is only a partially list of the items that a reviewer will scrutinize. For a full evaluation of your dbe application prior to submission, contact the DBE program specialists at Kleiner & Cazeau at (305) 517-1327 ext 102.

In January 2011, U.S. Transportation Secretary Ray LaHood announced  a final rulemaking that will help economically and socially disadvantaged businesses take advantage of opportunities to participate in federally funded highway, transit and airport projects.  The final rule, issued by the U.S. Department of Transportation (DOT) , will also hold states and local agencies more accountable for including disadvantaged businesses in their transportation plans

 The U.S. Department of Transportation’s Disadvantaged Business Enterprise (DBE) Program helps small businesses owned and controlled by socially and economically disadvantaged individuals compete for government contracts.  The Department also requires state and local transportation agencies to establish goals for DBE participation. 

Significantly, the final rule implements changes that have been long requested by DBE and ACDBE firms as well as the organizations that represent them.

As a result of the final rule, the personal net worth limit for DBE owners will finally be adjusted for inflation from the present $750,000 to $1.32 million.  The current limit was set in 1989 and has not been adjusted since. 

Additionally, the final rule will also reduce burdens on DBE and ACDBEs by requiring  all states to accept DBE certifications obtained in other states, unless the state finds good cause not to accept it.  The rule establishes a process for resolving issues with respect to eligibility raised by states concerning out-of-state firms.   

Furthermore, the Department of Transportation’s new rulemaking will require greater accountability from state and local transportation agencies for including disadvantaged businesses in their spending plans.  Those that fail to meet established goals for DBE participation will be required to evaluate why the goals were not met and offer a plan to help meet the goal in the future. 

Finally, the Department of Transportation’s rulemaking will also add provisions to ensure that prime contractors fulfill commitments to use DBE subcontractors.  State and local agencies will be required to monitor each contract to make sure prime contractors are fulfilling their obligations and do not dismiss DBE subcontractors without good cause. The rule also requires state and local agencies to create a plan for improving the use of small businesses, including DBEs.