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TuesdayFebruary 2, 1999

Part II

Department ofTransportationOffice of the Secretary

49 CFR Parts 23 and 26Participation by Disadvantaged BusinessEnterprises in Department ofTransportation Programs; Final Rule

5096 Federal Register / Vol. 64, No. 21 / Tuesday, February 2, 1999 / Rules and Regulations

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 DisadvantagedBusiness Enterprises in Department ofTransportation Programs

AGENCY: Office of the Secretary, DOT.ACTION: Final rule.

SUMMARY: This final rule revises theDepartment of Transportation’sregulations for its disadvantagedbusiness enterprise (DBE) program. TheDBE program is intended to remedy pastand current discrimination againstdisadvantaged business enterprises,ensure a ‘‘level playing field’’ and fosterequal opportunity in DOT-assistedcontracts, improve the flexibility andefficiency of the DBE program, andreduce burdens on small businesses.This final rule replaces the former DBEregulation, which now contains only therules for the separate DBE program forairport concessions, with a newregulation. The new regulation reflectsPresident Clinton’s policy to mend, notend, affirmative action programs. Itmodifies the Department’s DBE programin light of developments in case lawrequiring ‘‘narrow tailoring’’ of suchprograms and last year’s Congressionaldebate concerning the continuation ofthe DBE program. It responds tocomments on the Department’sDecember 1992 notice of proposedrulemaking (NPRM) and its May 1997supplemental notice of proposedrulemaking (SNPRM).DATES: This rule is effective March 4,1999. Comments on PaperworkReduction Act matters should bereceived by April 5, 1999; however, late-filed comments will be considered tothe extent practicable.ADDRESSES: Persons wishing tocomment on Paperwork Reduction Actmatters (see discussion at end ofpreamble) should send comments toDocket Clerk, Docket No. OST–97–2550,Department of Transportation, 400 7thStreet, SW., Room 4107, Washington,DC 20590. We emphasize that thedocket is open only with respect toPaperwork Reduction Act matters, andthe Department is not acceptingcomments on other aspects of theregulation. We request that, in order tominimize burdens on the docket clerk’sstaff, commenters send three copies oftheir comments to the docket.Commenters wishing to have their

submissions acknowledged shouldinclude a stamped, self-addressedpostcard with their comments. Thedocket clerk will date stamp thepostcard and return it to the commenter.Comments will be available forinspection at the above address from 10a.m. to 5:00 p.m., Monday throughFriday.FOR FURTHER INFORMATION CONTACT:Robert C. Ashby, Deputy AssistantGeneral Counsel for Regulation andEnforcement, Department ofTransportation, 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 ofEnvironmental, Civil Rights and GeneralLaw, Department of Transportation, 4007th Street, SW., Room 5432,Washington, DC 20590, phone number(202) 366–8023 (voice), (202) 366–8536(fax).SUPPLEMENTARY INFORMATION:

Background

The Department has the importantresponsibility of ensuring that firmscompeting for DOT-assisted contractsare not disadvantaged by unlawfuldiscrimination. For eighteen years, theDepartment’s most important tool formeeting this responsibility has been itsDisadvantaged Business Enterprise(DBE) program. This program began in1980. Originally, the program was aminority/women’s business enterpriseprogram established by regulation underthe authority of Title VI of the CivilRights Act of 1964 and othernondiscrimination statutes that apply toDOT financial assistance programs. See49 CFR part 23.

In 1983, Congress enacted, andPresident Reagan signed, the firststatutory DBE provision. This statuteapplied primarily to small firms ownedand controlled by minorities in theDepartment’s highway and transitprograms. Firms owned and controlledby women, and the Department’s airportprogram, remained under the original1980 regulatory provisions. In 1987,Congress enacted, and President Reagansigned, statutes expanding the programto airports and to women-owned firms.In 1991 (for highway and transitprograms) and 1992 (for airportprograms), Congress enacted, andPresident Bush signed, statutesreauthorizing the expanded DBEprogram.

After each statutory amendment, andat other times to resolve program issues,the Department amended part 23. Theresult has been that part 23 has become

a patchwork quilt of a regulation. Inaddition, years of interpretation byvarious grantees and different DOToffices has created confusion andinconsistency in programadministration. These problems,particularly in the area of certification,were criticized in General AccountingOffice reports. The Department’s desireto improve program administration andmake the rule a more unified whole ledto our publication of a December 1992notice of proposed rulemaking (NPRM).

The Department received about 600comments on this NPRM. TheDepartment carefully reviewed thesecomments and, by early 1995, hadprepared a draft final rule responding tothem. However, in light of the SupremeCourt’s June 1995 decision in Adarandv. Peña and the Administration’s reviewof affirmative action programs, theDepartment conducted further review ofthe DBE program. As a result, ratherthan issuing a final rule, we issued asupplemental notice of proposedrulemaking (SNPRM) in May 1997. ThisSNPRM incorporated responses to thecomments on the 1992 NPRM andproposed further changes in theprogram, primarily in response to the‘‘narrow tailoring’’ requirements ofAdarand. We received about 300comments on the SNPRM. TheDepartment has carefully consideredthese comments, and the final ruleresponds to them. The final rule alsospecifically complies with therequirements that the courts haveestablished for a narrowly tailoredaffirmative action program.

At the same time that the Departmentwas working on this final rule, Congressonce again considered reauthorizationof the DBE program. In both the Houseand the Senate, opponents of affirmativeaction sponsored amendments thatwould have effectively ended theprogram. In both cases, bipartisanmajorities defeated the amendments.The final highway/transit authorizationlegislation, known as the TransportationEquity Act for the 21st Century (TEA–21), retains the DBE program. In shapingthis final rule, the Department haslistened carefully to what bothsupporters and opponents of theprogram have said in Congressionaldebates.

Key Points of the Final RuleThis discussion reviews and responds

to the SNPRM comments and theCongressional debates on certain keyissues. Congressional debate referencesare to the Congressional Record forMarch 5 and 6, 1998, for the Senatedebate and April 1, 1998, for the Housedebate, unless otherwise noted.

5097Federal Register / Vol. 64, No. 21 / Tuesday, February 2, 1999 / Rules and Regulations

1. Quotas and Set-AsidesSNPRM Comments: Most comments

on this issue came from non-DBEcontractors, who argued that theprogram was a de facto quota program.Many of these contractors said thatrecipients insisted that they meetnumerical goals regardless of otherconsiderations, and that the recipientsdid not take showings of good faithefforts seriously. Some non-DBEcontractor organizations argued, inaddition, that the program was a quotaprogram because it was based on astatute that had a 10 percent target forthe use of businesses defined by a racialclassification.

Congressional Debate: Opponents ofthe DBE program generally asserted thatit created quotas or set-asides. SenatorMcConnell described the entireprogram, particularly the provision that‘‘not less than 10 percent’’ of authorizedfunds go to DBEs, as

* * * a $17.3 billion quota. In otherwords, if the government decides that you arethe preferred race and gender, then you areable to compete for $17.3 billion of taxpayer-funded highway contracts. But, if you are thewrong race and gender, then—too bad—youcan’t compete for that $17 billion pot.(S1936).

The ‘‘not less than 10 percent’’ languagealso led opponents, such as SenatorAshcroft, to label the program a ‘‘set-aside,’’ (S1405), a term also employed intestimony provided by a law professorfrom California who said that the statute‘‘imposes a set-aside that’s requiredregardless of the availability of race-neutral solutions.’’ (S1407). SenatorGorton said that the DBE statuteprovides that ‘‘those not defined asdisadvantaged in our society areabsolutely barred and prohibited fromgetting certain governmental contracts.’’(S1415).

On the other hand, supporters of theprogram were adamant that it was nota quota program. Senator Baucus arguedthat the program, as implemented byDOT, allows substantial flexibility torecipients and contractors. Recipientscould have an overall goal other than 10percent under current rules, he pointedout. Senator Kerry of Massachusettsadded that what the statute does is to‘‘set a national goal. And it isappropriate in this country to setnational goals for what we will do to tryto break down the walls ofdiscrimination. * * *’’ (S1408). He alsoalluded to the flexibility of the Secretaryto permit overall goals of less than 10percent. Senator Robb stated:

I want to stress at the outset that thisprogram is not a ‘‘quota program,’’ as somehave suggested. There is a great difference

[between] an aspirational goal and a rigidnumerical requirement. Quotas utilize rigidnumerical requirements as a means ofimplementing a program. The DBE programuses aspirational goals. (S1425).

With respect to individual contractgoals, Senator Baucus said, ‘‘once a goalis established for a contract, eachcontractor must make a good-faith effortto meet the goal—not mathematicallyrequired, not quota required, but a goodfaith effort to meet it.’’ (S1402). SenatorBaucus pointed to provisions of theSNPRM concerning overall goals, meansof meeting them, and good-faith effortsas further narrowly tailoring theprogram. The SNPRM confirms, he said,that ‘‘contract goals are not binding. Ifa contractor makes good faith efforts tofind qualified women or minority-owned subcontractors, but fails to meetthe goal, there is no penalty.’’ (S1403).Senator Robb added that ‘‘Contract goalsare not operated as quotas because theyrequire that the prime contractor make‘good faith efforts’ to find DBEs. If aprime contractor cannot find qualifiedand competitive DBEs, the goal can bewaived.’’ (S1425).

One of the Senators who addressedthe quota/set-side issue in the mostdetail was Senator Domenici. Heconcluded that ‘‘I do not agree that thisminority business program we have inthis ISTEA bill before us is a programthat mandates quotas and mandates set-asides.’’ (S1426). He made thisstatement, in part, on the basis of March5, 1998, letter to him signed bySecretary of Transportation RodneySlater and Attorney General Janet Reno.In relevant part, this letter (whichSenator Domenici inserted into therecord) read as follows:

The 10 percent figure contained in thestatute is not a mandatory set aside or rigidquota. First, the statute explicitly providesthat the Secretary of Transportation maywaive the goal for any reason * * * Second,in no way is the 10 percent figure imposedon any state or locality * * * Moreover, stateagencies are permitted to waive goals whenachievement on a particular contract or evenfor a specific year is not possible. The DBEprogram does not set aside a certainpercentage of contracts or dollars for aspecific set of contractors. Nor does the DBEprogram require recipients to use set-asides.The DBE program is a goals program whichencourages participation without imposingrigid requirements of any type. Neither theDepartment’s current nor proposedregulations permit the use of quotas. TheDBE program does not use any rigidnumerical requirements that would mandatea fixed number of dollars or contracts forDBEs. (S1427).

The debate in the House proceeded insimilar terms. Opponents of the DBEprogram, such as Representative

Roukema (H2000), Representative Cox(H2004) and Speaker Gingrich (H2009)said the legislation constituted a quota,while proponents, such asRepresentatives Tauscher (H2001),Poshard (H2003), Bonior (H2004) andMenendez (H2004) said the program didnot involve quotas or set-asides.

DOT Response: The DOT DBEprogram is not a quota or set-asideprogram, and it is not intended tooperate as one. To make this pointunmistakably clear, the Department hasadded explicitly worded new oramended provisions to the rule.

Section 26.41 makes clear that the 10percent statutory goal contained inISTEA and TEA–21 is an aspirationalgoal at the national level. It does not setany funds aside for any person or group.It does not require any recipient orcontractor to have 10 percent (or anyother percentage) DBE goals orparticipation. Unlike former part 23, itdoes not require recipients to take anyspecial administrative steps (e.g.,providing a special justification to DOT)if their annual overall goal is less than10 percent. Recipients must set goalsconsistent with their own circumstances(see § 26.45). There is no direct linkbetween the national 10 percentaspirational goal and the way a recipientoperates its program. The Departmentwill use the 10 percent goal as a meansof evaluating the overall performance ofthe DBE program nationwide. Forexample, if nationwide DBEparticipation were to dropprecipitously, the Department wouldreevaluate its efforts to ensurenondiscriminatory access to DOT-assisted contracting opportunities.

Section 26.43 states flatly thatrecipients are prohibited from usingquotas under any circumstances. Thesection also prohibits set-asides exceptin the most extreme circumstanceswhere no other approach could beexpected to redress egregiousdiscrimination. Section 26.45 makesclear that in setting overall goals,recipients aspire to achieving only theamount of DBE participation that wouldbe obtained in a nondiscriminatorymarket. Recipients are not to simplypick a number representing a policyobjective or responding to any particularconstituency.

Section 26.53 also outlines whatbidders must do to be responsive andresponsible on DOT-assisted contractshaving contract goals. They must makegood faith efforts to meet these goals.Bidders can meet this requirementeither by having enough DBEparticipation to meet the goal or bydocumenting good faith efforts, even ifthose efforts did not actually achieve the


goal. These means of meeting contractgoal requirements are fully equivalent.Recipients are prohibited from denyinga contract to a bidder simply because itdid not obtain enough DBE participationto meet the goal. Recipients mustseriously consider bidders’documentation of good faith efforts. Tomake certain that bidders’ showings aretaken seriously, the rule requiresrecipients to offer administrativereconsideration to bidders whose goodfaith efforts showings are initiallyrejected.

These provisions leave no room fordoubt: there is no place for quotas in theDOT DBE program. In the Department’soversight, we will take care to ensurethat recipients implement the programconsistent with the intent of Congressand these regulatory prohibitions.

2. Sanctions for Recipients Who Fail ToMeet Overall Goals

SNPRM Comments: The issue ofsanctions for recipients who fail to meetoverall goals was not a subject ofcomments on the SNPRM. Since theDepartment has never imposed suchsanctions, this absence of comment isnot surprising.

Congressional Debate: DBE programopponents asserted, in connection withtheir argument that the DBE program isa quota program, that the Departmentcould impose sanctions for failure tomeet goals. ‘‘The goals haverequirements and the real threat ofsanctions,’’ Senator McConnell said.(S1488). Citing a provision of a FederalHighway Administration (FHWA)manual saying that if ‘‘a state hasviolated or failed to comply withFederal laws or * * * regulations,’’FHWA could withhold Federal funding,Senator McConnell said,

In other words, there are sanctions. Thesame threats appear in * * * the Federaltransportation regulations * * * When theFederal government is wielding that kind ofweapon from on high, it does not have topunish them. A 10 percent quota is still aquota, even if the States always comply andno one is formally punished. (Id.)

Defenders of the DBE programpointed out that the Department hadnever punished a recipient for failing tomeet an overall goal (e.g., Rep.Tauscher, H2001; Senator Boxer,S1433). Senator Domenici askedSecretary Slater and Attorney GeneralReno whether there are sanctions,penalties, or fines that may be (or everhave been) imposed on a recipient whodoes not meet DBE program goals. Heentered the following reply in therecord:

No state has ever been sanctioned by DOTfor not meeting its goals. Nothing in the

statute or regulations imposes sanctions onany state recipient that has attempted in goodfaith, but failed, to meet its self-imposedgoals. (S1427).

Senator Lieberman added that if statesfail to meet their own goals, ‘‘there is noFederal sanction or enforcementmechanism.’’ (S1493).

DOT Response: The Department hasnever sanctioned a recipient for failingto meet an overall goal. We do notintend to do so. To eliminate anyconfusion, we have added a newprovision (§ 26.47) that explicitly statesthat a recipient cannot be penalized, ortreated by the Department as being innoncompliance with the rule, simplybecause its DBE participation falls shortof its overall goal. For example, if arecipient’s overall goal is 12 percent,and its participation is 8 percent, theDepartment cannot and will notpenalize the recipient simply becauseits actual DBE participation rate wasless than its goal.

Overall goals are not quotas, and theDepartment does not sanction recipientsbecause their participation levels fallshort of their overall goals. Of course, ifa recipient does not have a DBEprogram, does not set a DBE goal, doesnot implement its DBE program in goodfaith, or discriminates in the way itoperates its program, it can be found innoncompliance. But its noncompliancewould never be having failed to ‘‘makea number.’’

3. Economic DisadvantageSNPRM Comments: Some

commenters favored eliminating thepresumption of economic disadvantage,saying that applicants should have toprove their economic disadvantage.Other commenters favored obtainingadditional financial information fromapplicants so that, even if thepresumption remained in force,recipients would have a better idea ofwhether applicants really weredisadvantaged. The question of thestandard for determining disadvantagegenerated substantial comment, withsome commenters favoring, and othersobjecting to, the proposed use of apersonal net worth standard to assistrecipients in determining whether anapplicant was economicallydisadvantaged. There was alsodisagreement among commentersconcerning the level at which such astandard should be set (e.g., $750,000,or something higher or lower). Thesecomments, and the Department’sresponse to them, are further discussedin the section-by-section analysis for§ 26.67.

Congressional Debate: The Congressdebated the topic of who is regarded as

economically disadvantaged under thestatute. DBE opponents, includingSenators Ashcroft (S1405) andMcConnell (S1418) and RepresentativeCox (H2004), asserted that outrageouslyrich people could be eligible toparticipate as DBEs, frequently using theSultan of Brunei as an example. Thebasic thrust of their argument was thatif the program does not exclude wealthymembers of the designated groups—meaning those who are not, in fact,disadvantaged—then it is‘‘overinclusive’’ and therefore notnarrowly tailored. Senator McConnelladded that, because the Department’sSNPRM did not include a specific dollaramount for a cap on personal net worth,it would not be effective. (S1486). Onthe other hand, DBE program supporterscited the SNPRM’s proposed net worthcap as an effective device to stopwealthy people from participating in theprogram. These included MinorityLeader Daschle (with a reference to aletter from the Associate AttorneyGeneral, S1413), Senator Baucus (S1414,S1423), Senator Lieberman (S1493),Senator Boxer (S1433), and SenatorMoseley-Braun, who responded to theSultan of Brunei example by noting thatthe program was directed primarily atU.S. citizens (S1420).

DOT Response: The final rule(§ 26.67) specifically imposes a personalnet worth cap of $750,000. This meansthat, regardless of race, gender or thesize of their business, any individualwhose personal net worth exceeds$750,000 is not consideredeconomically disadvantaged and is noteligible for the DBE program. Theprovision also makes it much easier forrecipients to determine whether anindividual’s net worth exceeds the cap.Applicants will have to submit astatement of personal net worth andsupporting documentation to therecipient with their applications. If theinformation shows net worth above thecap, the recipient would rebut thepresumption based on the informationin the application itself and theindividual would not be eligible for theprogram. In such a case, it would not benecessary for a third party to challengethe economic disadvantage of anapplicant in order to rebut thepresumption. While there have beenvery few documented cases of wealthyindividuals seeking to take advantage ofthe Department’s program, the revisedprovisions of part 26 virtually eliminateeven the possibility of this type ofabuse.

4. Social DisadvantageSNPRM Comments: A few

commenters suggested that the


presumption of social disadvantage, aswell as that of economic disadvantage,be eliminated, so that applicants wouldhave to demonstrate both elements ofdisadvantage. Any presumption ofdisadvantage tied to a racialclassification, in the view of some ofthese commenters, undermined theconstitutionality of the program. Othercommenters noted that persons who arenot members of the presumptivelydisadvantaged groups can be eligibleand, in some cases, suggested that thecriteria for evaluating such applicationsbe clarified.

Congressional Debate: Thepresumption of social disadvantagedrew fire from DBE program opponentsbecause it was allegedly overinclusive.For example, Senator McConnellproduced a map illustrating the over100 countries of origin leading toinclusion in one of the presumedsocially disadvantaged groups, pointingout that people from some countries(e.g., Pakistan) are presumed to besocially disadvantaged while those fromother countries (e.g., Poland) are not.(S1418). Senator McConnell said thatthere was no basis for selecting thisdefinition over any other. (Id.) SenatorHatch also listed the countries fromwhich Asian-Pacific Americans andSubcontinent Asian-Americans canoriginate, suggesting that it wasinappropriate to create ‘‘all kinds ofspecial interest groups who are vying forthese programs.’’ (S1411).

DBE proponents responded thatdiscrimination against minorities andwomen in general, and against specificminorities in particular (e.g., AfricanAmericans) was very real and formed abasis for the presumption of socialdisadvantage (see discussion belowconcerning the existence ofdiscrimination). Senator Baucus alsonoted that this presumption could beovercome. (S1402).

Opponents also charged that thepresumption of social disadvantage wasunderinclusive; that is, ‘‘youunderinclude people who have a rightto be included in the bid process.’’(Senator McConnell, S1399). The peoplewho are not included who have a rightto be, in the view of opponents, arewhite males (e.g., Senator Sessions’reference to testimony from AdarandConstructors’ owner, S1400). SenatorKennedy disagreed with this assertion,saying

Of course, this program doesn’t just helpwomen and minorities. It extends a helpinghand to firms owned by white males, as well.They can be certified to [participate] if theyprove that they have been disadvantaged. Justask Randy Pech—owner of the Adarand

Construction Firm—because he is currentlyseeking certification. (S1482).

Senator Domenici was interested in thesame question, and entered into therecord the following response fromSecretary Slater and Attorney GeneralReno:

Any individual owning a business maydemonstrate that he is socially andeconomically disadvantaged, even if thatindividual is not a woman or a minority.Both the current and proposed regulationsprovide detailed guidance to recipients toassist them in making individualdeterminations of disadvantaged status. And,in fact, businesses owned by white maleshave qualified for DBE status. (S1427).

DOT Response: By having passed theDBE statutory provision, after lengthyand specific debate, Congress has onceagain determined that members of thedesignated groups should be presumedsocially disadvantaged. All of thesegroups are specifically incorporated byreference in the legislation that Congressdebated and approved. Thispresumption (i.e., a determination thatit is not necessary for group members toprove individually that they have beenthe subject of discrimination ordisadvantage) is based on theunderstanding of Members of Congressabout the discrimination that membersof these groups have faced. Thepresumption is rebuttable in the DOTprogram. If a recipient or third partydetermines that there is a reasonablebasis for concluding that an individualfrom one of the designated groups is notsocially disadvantaged, it can pursue aproceeding under § 26.87 to remove thepresumption. Likewise, a white male, oranyone else who is not presumed to bedisadvantaged, can make an individualshowing of social and economicdisadvantage and participate in theprogram on the same basis as any otherdisadvantaged individual (see § 26.67).

5. The ‘‘Low-Bid System’’SNPRM Comments: Non-DBE

contractors expressed concern that avariety of provisions under the programand the SNPRM adversely affected thelow-bid system, including contractgoals, evaluation credits, and good faithefforts guidance concerning primecontractors’ handling of subcontractorprices and consideration of otherbidders’ success in meeting goals.

Congressional Debate: Opponents ofthe DBE program assert that the programresults in white male contractors notreceiving contracts they wouldotherwise expect to receive. SenatorSessions cited the statement of theAdarand company to this effect.(S1400). Senator Ashcroft said that ‘‘iftwo bids come in from two

subcontractors, one owned by a whitemale and the other by a racial minority,and the bids are the same, or even close,the job will go to the minority-ownedcompany, not the low bidder.’’ (S1405).Senator Gorton inserted into the recordletters from a Spokane subcontractorasserting that, in a number of cases, ithad lost subcontracts to DBE firmsdespite having a lower quote. (S1415–16). Representative Roukema also citedexamples of firms who made similarassertions. (H2000).

In contrast, DBE program proponentsargued that the program was aboutleveling the playing field for DBEs.Senator Moseley-Braun cited lettersfrom her constituents for the point that

* * * the DBE program is not about takingaway contracts from qualified male-ownedbusinesses and handing them over tounqualified female-owned firms. Theprogram is not about denying contracts toCaucasian low bidders in favor of higher bidsthat happen to have been submitted byHispanics or African Americans or Asians orwomen. (S1420).

Without such a program, herconstituents’ letters said, they wouldlose the chance to compete. (Id.). Citingtestimony from a Judiciary Committeehearing, Senator Kennedy noted that itwas the experience of some DBEs thatwhite male prime contractors hadaccepted higher bids from other firms toavoid working with DBEs. (S1430).

Why would a general contractor accept ahigher bid? It doesn’t make sense unless youremember that the traditional businessnetwork doesn’t include women orminorities * * * [A woman business ownertestified] that some general contractors wouldrather lose money than deal with femalecontractors. (Id.)

DOT Response: For the most part,statutory low-bid requirements existonly at the prime contracting level. Thatis, state and local governments, inawarding prime contracts, must selectthe low bidder in many procurements(there may be exceptions in some typesof purchases). Nothing in this regulationrequires, under any circumstances, arecipient to accept a higher bid for aprime contract from a DBE when a non-DBE has presented a lower bid. Thisrule does not interfere with recipients’implementation of state and local low-bid legislation.

The selection of subcontractors by aprime contractor is typically not subjectto any low-bid requirements under stateor local law. Prime contractors haveunfettered discretion to select anysubcontractor they wish. Price is clearlya key factor, but nothing legally compelsa prime contractor to hire thesubcontractor who makes the lowestquote. Other factors, such as the prime


contractor’s familiarity and experiencewith a subcontractor, the quality of asubcontractor’s work, the word-of-mouth reputation of the subcontractorin the prime contracting community, orthe prime’s comfort or discomfort withdealing with a particular subcontractorcan be as or more important than pricein some situations. It is in this contextthat § 26.53 requires that primecontractors make good faith efforts toachieve DBE contract goals. The ruledoes not require that recipients ignoreprice or quality, let alone obtain acertain amount of DBE participationwithout regard to other considerations.The good faith efforts requirements areintended to ensure that primecontractors cannot simply refuse toconsider qualified, competitive DBEsubcontractors. At the same time, thegood faith efforts waiver of contractgoals serves as a safeguard to ensure thatprime contractors will not be forced intoaccepting an unreasonable or excessivequote from a DBE subcontractor.

6. ConstitutionalitySNPRM Comments: Non-DBE

contractors and their groups argued thatthe SNPRM proposals, particularly withrespect to overall goals and the use ofrace-conscious measures, failed to meetthe Adarand narrow tailoring test. Manyof these commenters said that theoverall goals were suspect because theydid not adequately consider the capacityof DBEs to perform contracts andAdarand requires that race-consciousmeasures may be used only after arecipient has demonstrated that race-neutral means have failed. The use ofpresumptions based on racialclassifications was viewed asintrinsically unconstitutional by thesecommenters, many of whom cited thelanguage of Judge Kane’s decision in theAdarand remand to this effect. Somecommenters also contended that, absentrecipient-specific findings of compellingneed, the program could not beconstitutional. They said that existinginformation alleging compellinginterest—such as various disparitystudies or information compiled by theDepartment of Justice—was inadequateto meet the compelling interest test.DBEs and recipients who commenteddefended the constitutionality of theprogram, often citing experience withdiscrimination in the marketplace andcontending that the SNPRM succeededin narrowly tailoring the program.

Congressional Debate: Proponents andopponents of the DBE programextensively debated theconstitutionality of the DBE statutoryprovision and the entire DBE program.Generally, opponents argued that the

Supreme Court and District Courtdecisions in Adarand rendered theprogram unconstitutional, whileproponents said that the decisions didnot have that effect.

Proponents and opponents of the DBEprogram agreed that the SupremeCourt’s Adarand decision established atwo-part test for the constitutionality ofa program that uses a racialclassification. The program must bebased on a compelling governmentalinterest and be narrowly tailored tofurther that interest (e.g., SenatorMcConnell, S1396; Senator Baucus,S1403). Opponents relied on the findingof a Colorado district court on remandthat the program was not narrowlytailored and was thus unconstitutional(Senator McConnell, S 1396; SenatorAshcroft, S1405). Proponents repliedthat the remand decision representedthe views of only one district court(Senator Baucus, S1403), that it failed toproperly apply the reasoning of theSupreme Court decision with respect tonarrow tailoring (Senator Domenici,S1425), and that the Department’sforthcoming regulations would ensurethat the program was narrowly tailored(see discussion below).

A. Compelling Interest(1) Existence of Discrimination.

Proponents (and some opponents) of theDBE provision said that discriminationand/or disadvantage with respect tominorities and/or women persists. Inthe House, these includedRepresentative 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), andRepresentative Millender-McDonald(H2011). DBE opponents typicallyremained silent on this point, neitheraffirming nor denying the existence ofdiscrimination against women andminorities.

There was a similar pattern in theSenate debates. Opponents typically didnot address the present existence ofdiscrimination or disadvantage withrespect to minorities and women or itscontinuing effects, spoke of suchdiscrimination as something that existedin the past (Senator Sessions, S1399;Senator Hatch, S1411), or asserted thatrace-based disadvantage or

discrimination no longer exists (SenatorAshcroft, S1406).

The Senators who said that suchdiscrimination persists includedSenator Baucus (S1403, S1413, S1496),Senator Warner (S1403), Senator Kerry(S1408), Senator Wellstone (S1410),Senator Moseley-Braun (S1419–20),Senator Robb (S1422); SenatorBrownback (S1423–24), SenatorDomenici (S1425–26), Senator Kennedy(S1429–30, S1482), Senator Specter(S1485), Senator McCain (S1489),Senator Lautenberg (S1490), SenatorDurbin (S1491), Senator Daschle(S1492), Senator Lieberman (S1493),Senator Bingaman (S1494), SenatorMurray (S1495), and Senator Dorgan(S1495).

(2) Evidence of discrimination ordisadvantage. In comments on thepassage of the TEA–21 conferencereport in the Senate, Senator Chafeenoted a Colorado Department ofTransportation disparity study thatfound a disproportionately smallnumber of women- and minority-ownedcontractors participating in that state’shighway construction industry. Morethan 99 percent of contracts went tofirms owned by white men.(Congressional Record, May 22, 1998;S5413). In the House discussion of theconference report, RepresentativeNorton presented an extensive summaryof relevant evidence of discriminationforming the basis for a compelling needfor the DBE program. (H3957).

Throughout the debate, the Memberswho affirmed the existence ofdiscrimination and/or disadvantageasserted a number of factual bases forconcluding that the DBE program wasnecessary. This information is largelydrawn from the Senate debate; thebriefer House debate contains lessdetail.

Senator Baucus cited disparitiesbetween the earnings of women andmen and between the percentage ofsmall businesses women own and thepercentage of Federal procurementdollars they receive. He also noted thatminorities make up 20 percent of thepopulation, own 9 percent ofconstruction businesses, and get only 4percent of construction receipts.(S1403). Finally, Senator Baucus, via aletter from the Associate AttorneyGeneral, cited to numerousCongressional findings concerning theeffects of discrimination in theconstruction industry and in DOT-assisted programs. (S1413).

Senator Kerry added that women own9.2 percent of the nation’s constructionfirms but their companies earn onlyabout half of what is earned by male-owned firms. (S1409). Senator Robb


commented that the evidence of raciallybased disadvantage is ‘‘compelling anddisturbing.’’ He continued, stating that,‘‘White-owned construction firmsreceive 50 times as many loan dollars asAfrican-American owned firms thathave identical equity.’’ (S1422). SenatorKennedy said that the playing field forwomen and minorities and othervictims of discrimination was still notlevel. Job discrimination againstminorities and the ‘‘glass ceiling’’ forwomen still persisted, he said, addingthat ‘‘Nowhere is the deck stacked moreheavily against women and minoritiesthan in the construction industry.’’(S1429). He cited a number of instancesin which minority or female contractorsencountered overt discrimination intrying to get work. (S1429–30).

Senator Lautenberg said that, fortransportation-related contracts,minority-owned firms get only 61 centsfor every dollar of work that white male-owned businesses receive. Thecomparable figure for women-ownedfirms was 48 cents. He also mentionedthat ‘‘women-owned businesses have alower rate of loan delinquency, yet stillhave far greater difficulty in obtainingloans.’’ (S1490). He then spoke of thecontinuing effects of pastdiscrimination:

Jim Crow laws were wiped off the booksover 30 years ago. However, their perniciouseffects on the construction industry remain.Transportation construction has historicallyrelied on the old boy network which, untilthe last decade, was almost exclusively awhite, old boy network. * * * This is anindustry that relies heavily on businessfriendships and relationships establisheddecades, sometimes generations, ago—yearsbefore minority-owned firms were evenallowed to compete. (Id.)

Senator Durbin referred to recentstudies concerning job bias againstminorities and women. (S1491). SenatorLieberman referred generally toprevious Congressional committeefindings and testimony concerning still-existing barriers to full participation forminorities and women. (S1493). He alsocited the May 1996 Department ofJustice survey of discrimination and itseffects in business and contracting. Hereferred to a recent study in Denvershowing that African Americans were 3times, and Hispanics 1.5 times, morelikely than whites to be rejected forbusiness loans. Senator Daschlesummed up by saying, ‘‘[t]here is clearlya compelling interest in addressing thepervasive discrimination that hascharacterized the highway constructionindustry.’’ (S1492).

Throughout the portion of the debatedescribed above, many of the Membersstressed that goal-based programs like

the DBE program were the only effectiveway to combat the continuing effects ofdiscrimination.

Senator Baucus cited the experienceof Michigan, in which DBE participationin the state-funded portion of thehighway program fell to zero in a nine-month period after the state terminatedits DBE program, while the Federal DBEprogram in Michigan was able tomaintain 12.7 percent participation.(S1404). Senator Kerry also raised theMichigan example, and went on to citesimilar sharp decreases in DBEparticipation when Louisiana,Hillsborough County, Florida, and SanJose, California, eliminated affirmativeaction programs covering state- andlocally-funded programs. Senator Kerryasked rhetorically:

* * * is that just the economy of ourcountry speaking, an economy at onemoment that is capable of having 12 percentand at another moment, where they lose theincentive to do so, to drop down to zero, todrop down by 99 percent, to drop down by80 percent, to have .4 at the State level whileat the Federal level there are 12 percent? Youcould not have a more compelling interest ifyou tried. * * * (S1409–10).

Senator Moseley-Braun added theexamples of Arizona, Arkansas, RhodeIsland, and Delaware to the jurisdictionscited by other members where state-funded projects without a DBE programhave significantly less DBE participationthan Federally funded projects subjectto the DBE program. She added, ‘‘Wherethere are no DBE programs, women- andminority-owned small businesses areshut out of highway construction.’’(S1420–21). Senator Kennedy addedNebraska, Missouri, Tampa andPhiladelphia to the list of jurisdictionsthat experienced precipitous drops inDBE participation after goals programsended. (S1429–30; S1482). He also citedcomments from DBE companies thatgoal programs were needed to surmountdiscrimination-related barriers. (S1482).Senator Domenici repeated many of thesame points as previous DBEproponents concerning the basis forconcluding that the program wasneeded (S1426), as did SenatorKempthorne. (S1494).

Senator Robb emphasized that theDBE program was essential to combatingdiscrimination and ensuring economicopportunity, explicitly linking the fall-off in DBE participation to continuingdiscrimination:

Where DBE programs at the State levelhave been eliminated, participation byqualified women and qualified minorities ingovernment transportation contracts hasplummeted. There is no way to knowwhether this discrimination is intentional orsubconscious, but the effect is the same. This

experience demonstrates the sad butinescapable truth that, when it comes toproviding economic opportunities to womenand minorities, passivity equals inequality.(S1422).

3. Narrow tailoring.—DBE proponentscited the Department’s proposed DBErule as the vehicle that would ensurethat the DBE program would benarrowly tailored. They cited features ofthe SNPRM including a new mechanismfor calculation of overall goals, givingpriority to race-neutral measures inmeeting goals, a greater emphasis ongood faith efforts, DBE diversification,added flexibility for recipients, networth provisions, ability to challengepresumptions of social and economicdisadvantage, and flexibility in goal-setting. In comments on the Senateconsideration of the TEA–21 conferencereport, Senator Baucus concluded bysaying:

As I explained in my statements during thedebate on the McConnell amendment * * *the program is narrowly tailored, both underthe current and the new regulations, whichemphasize flexible goals tied to the capacityof firms in the local market, the use of race-neutral measures, and the appropriate use ofwaivers for good faith efforts. (CongressionalRecord, May 22, 1998; S5414).

Following Senator Baucus’ remarks,Senator Chafee, Chairman of thecommittee of jurisdiction, requested thathe be associated with Senator Baucus’remarks on constitutionality. (S5414).

DBE opponents denied that regulatorychange could result in a narrowlytailored program. Senator Smith said‘‘The administration’s attempt tocomply with the Court’s decision byfiddling around with the DOTregulations does not meet theconstitutional litmus test.’’ (S1398). Themost frequent argument against theefficacy of regulatory change was that aracial classification is inherently unableto be narrowly tailored. (SenatorSessions, S1399–1400; Senator Ashcroft,S1407).

DOT Response: The 1998 debate overDBE legislation was the most thoroughin which Congress has engaged sincethe beginning of the program. Therecord of this debate clearly supportsthe Department’s view that there is acompelling governmental interest inremedying discrimination and its effectsin DOT-assisted contracting. Congressclearly determined that real, pervasive,and injurious discrimination exists.Congress backed up that determinationwith reference to a wide range of factualmaterial, including private and publiccontracting, DOT-assisted and state-andlocally-funded programs and thefinancing of the contracting industry. Byretaining the DBE statutory provisions


against this factual background,Congress clearly found that there was acompelling governmental interest inhaving the program.

The courts, including the court in theAdarand Constructors Inc. v. Peña, 965F.Supp. 1556 (D. Colo., 1997) and thecourt in In re: Sherbrooke Sodding, 6–96–CV–41 (D. Minn. 1998), agree thatCongress has the power to legislate ona nationwide basis to addressnationwide problems. Congress has aunique role as the national legislature tolook at the whole of the United Statesfor the basis to find a compellinggovernmental interest supporting theuse of race-based remedies. Congress isnot required to make particularizedfindings of discrimination in individuallocalities to which a nationwideprogram may apply. Nor is Congressrequired to find that the Federalgovernment itself has discriminatedbefore applying a race-consciousremedy. (Id. at 1573).

Having reviewed the extensiveevidence of discrimination and itsrelationship to DOT-assistedcontracting, the District Court inAdarand determined that current andprevious DBE provisions were a‘‘considered response by Congress to theeffects of discrimination on the abilityof minorities to participate in themainstream of federal contracting.’’ (Id.at 1576). The court stated that ‘‘Congresshas a strong basis in evidence forenacting the challenged statutes, whichthus serve a ‘compelling governmentalinterest.’ ’’ (Id. at 1577). The extensiveCongressional debate and informationsupporting the enactment of the 1998DBE provision significantly strengthensthe existing basis for declaring that thisprogram serves a compellinggovernmental interest.

The basis for District Court’s view thatthe program at issue in Adarand isunconstitutional is stated most clearlyin the following passage:

Contrary to the [Supreme] Court’spronouncement that strict scrutiny is not‘fatal in fact,’ I find it difficult to envisage arace-based classification that is narrowlytailored. By its very nature, such [a] programis both underinclusive and overinclusive. (Id.at 1580).

By underinclusive, the court said itmeant that caucasians and members ofnon-designated minority groups areexcluded. By overinclusive, it said itmeant that all the members of thedesignated groups are presumed to beeconomically and/or sociallydisadvantaged, without Congress havinginquired whether a particular entityseeking a racial preference has sufferedfrom the effects of past discrimination(citing the Supreme Court’s Croson

decision, which concerned the powersof state and local governments to userace-based remedies). (Id.)

As Senator Domenici pointed out(S1425), the key words in the DistrictCourt’s opinion are ‘‘Contrary to the[Supreme] Court’s pronouncement.* * *’’ The District Court’s analysisdeparts markedly from the controllingdecision of the Supreme Court on thisissue (Adarand v. Peña, 515 U.S. 200(1995)). The Supreme Court’s languagewith which the District Court disagreedis the following:

Finally, we wish to dispel the notion thatstrict scrutiny is ‘‘strict in theory, but fatal infact.’’ [citation omitted] The unhappypersistence of both the practice and thelingering effects of racial discriminationagainst minority groups in this country is anunfortunate reality, and government is notdisqualified from acting in response to it* * * When race-based action is necessary tofurther a compelling interest, such action iswithin constitutional constraints if it satisfiesthe ‘‘narrow tailoring’’ test this Court has setout in previous cases. (515 U.S. at 237).

The Supreme Court evidently considersthe ‘‘not fatal in fact’’ language to havecontinuing vitality, having cited it in asubsequent case (U.S. v. Virginia, 518U.S. 515, note 6 (1996)).

Under the District Court’s analysis,Congress could never use a race-basedclassification, no matter howcompelling the need, because any suchclassification would intrinsically fail tobe narrowly tailored. This approacheffectively moots the determination ofwhether there is a compellinggovernmental interest. The SupremeCourt’s approach, by contrast, permits aracial classification to be used, given theexistence of a compelling interest, if itis narrowly tailored.

What is the test for narrow tailoring?As set forth in United States v. Paradise,480 U.S. 149, 171 (1987), the testincludes several factors: ‘‘the necessityfor relief and the efficacy of alternativeremedies; the flexibility and duration ofthe relief, including the availability ofwaiver provisions; the relationship ofthe goals to the relevant labor market;and the impact of the relief on the rightsof third parties.’’ In Adarand, theSupreme Court specifically invitedinquiry into whether there was anyconsideration of the use of race-neutralmeans to increase minority businessparticipation (related to the efficacy ofalternative remedies) and whether theprogram was appropriately limited sothat it will not last longer than thediscrimination it is designed toeliminate (related to the duration ofrelief). (515 U.S. at 238).

This final rule successfully addresseseach element of this test:

• The necessity of relief. Throughoutthe debate on the compellinggovernmental interest, the bipartisanmajority of both houses of Congressrepeatedly described the necessity of theDBE program’s goal-based approach toremedying the effects of discriminationin DOT-assisted contracting. The mostsignificant evidence demonstrating thenecessity of a goal-oriented program isthe evidence cited of the fall-off in DBEparticipation in state contracting whengoal-oriented programs end, comparedto participation rates in the Federal DBEprogram.

• Efficacy of alternative remedies.This element of the narrow tailoringstandard is related to the SupremeCourt’s inquiry concerning race-neutralprograms. Under § 26.51 of this rule,recipients are required to meet themaximum feasible portion of theiroverall goals by using race-neutralmeasures. Recipients are not required tohave contract goals on each contract.Instead, they are instructed to usecontract goals only for any portion oftheir overall goal they cannot meetthrough race-neutral measures. Contractgoals are intended as a safety net to beused when race-neutral means are noteffective to ensure that a recipient canachieve ‘‘level playing field.’’ Moreover,the regulations provide that recipientsmust reduce the use of contract goalswhen other means are sufficient to meettheir overall goals. This ensures thatrace-conscious relief is used only to theextent necessary and is replaced byrace-neutral as quickly as possible.

• Flexibility of relief. Flexibility isbuilt into the program in a variety ofways. Recipients set their own goals,based on local market conditions; theirgoals are not imposed by the federalgovernment nor do recipients have to tiethem to any uniform nationalpercentage. (§ 26.45). Recipients alsochoose their own method for goalsetting and can choose to base the goalon the evidence that they believe bestreflects their market conditions.(§ 26.45). Recipients have broaddiscretion to choose whether or not touse a goal on any given contract, and ifthey do choose to use a contract goal,they are free to set it at any level theybelieve is appropriate for the type andlocation of the specific work involved.(§ 26.51). The rule also ensuresflexibility for contractors by requiringthat any contract goal be waived entirelyfor a prime contractor that demonstratesthat it made good faith efforts but wasstill unable to meet the goal. (§ 26.53).The rule also allows recipients thatbelieve they can achieve equalopportunity for DBEs through differentapproaches to get waivers releasing


them from almost any of the specificrequirements of the rule. (§ 26.103).Recipients can also get exemptions fromthe rule if they have uniquecircumstances that make complyingwith the rule impractical. (§ 26.103).

• Duration of relief. The TEA–21 DBEprogram will end in 2004 unlessreauthorized by the Congress. In eachsuccessive reauthorization bill for thesurface transportation and airportprograms, Congress will have theopportunity to examine the current stateof transportation contracting anddetermine whether the DBE programstatutes are still necessary to remedy thecontinuing effects of discrimination. Inaddition, the duration of relief forindividuals and firms are limited by thepersonal net worth threshold andbusiness size caps. When anindividual’s personal wealth growsbeyond the threshold, he or she willlose the presumption of disadvantage.(§ 26.67). Similarly, when a firm’sreceipts grows beyond the smallbusiness size standards, it loses itseligibility to participate in the program.(§ 26.65). Finally, to ensure that race-conscious remedies are not used anylonger than absolutely necessary,§ 26.51 requires recipients to reduce theuse of contract goals and rely on race-neutral measures to the extent that theyare effective.

• Relationship of goals to the relevantmarket. The overall goal settingprovisions of § 26.45 require thatrecipient set overall goals based ondemonstrable evidence of the relativeavailability of ready, willing and ableDBEs in the areas from which eachrecipient obtains contractors. Theseprovisions ensure that there is as closea fit as possible between the goals set byeach recipient and the realities of itsrelevant market. When a recipient setscontract goals, § 26.51 provides thatthese goals are to be set realistically inrelation to the availability of DBEs forthe type and location of work involved.

• Impact of relief on the rights ofthird parties. The legitimate interests ofthird parties (e.g., prime contractors,non-DBE subcontractors) are onlyminimally impacted by the DBEprogram, since the program is aimed atreplicating a market in which there areno effects of discrimination and theprogram affects only a relatively smallpercentage of total federal-aid funds.The design of the overall and contractgoal provisions ensures that the use ofrace-conscious remedies having thepotential to affect the interests of thirdparties is limited to the extent necessaryto counter the effects of discrimination.Individual prime contractors are furtherprotected from suffering any undue

burdens by § 26.51, which prevents aprime contractor from losing a contractif it made good faith efforts but was stillunable to meet a goal. Non-DBE firmsare also protected by § 26.33, whichdirects recipients to take appropriatesteps to address areas ofoverconcentration of DBE firms incertain types of work that could undulyburden non-DBE firms seeking the sametype of work.

• Inclusion of appropriatebeneficiaries. The certificationprovisions of Subparts D and E, andparticularly the social and economicdisadvantage provisions of § 26.67,ensure that only firms owned andcontrolled by individuals who are infact socially and economicallydisadvantaged can participate in theprogram. Eligibility provisions guardagainst overinclusiveness by ensuringthat individuals with too great net worthare not presumed disadvantaged and bypermitting the recipient—on its owninitiative or as the result of acomplaint—to follow procedures torebut the presumption of social and/oreconomic disadvantage. They guardagainst underinclusiveness bypermitting any business owner,including a white male, to demonstratesocial and economic disadvantage on anindividual basis.

Section-by-Section Analysis

Section 26.1 What Are the Objectivesof This Part?

There were relatively few commentson this section of the SNPRM, most ofwhich agreed with the proposedlanguage. We have adopted thesuggestion of some commenters thatspecific reference be made to the role ofthe DBE program in helping DBEsovercome barriers (e.g., access to capitaland bonding) to equal participation. Wehave also added a specific reference tothe role of the program in creating alevel playing field on which DBEs cancompete fairly for DOT-assistedcontracts. Some non-DBE contractorsurged that language be added toexplicitly oppose ‘‘reversediscrimination.’’ The rule clearly statesthat nondiscrimination is the program’sfirst objective and the Departmentreiterates here that it opposes unlawfuldiscrimination of any kind.

Section 26.3 To Whom Does This PartApply?

This provision is unchanged from theSNPRM, except for references to thenew TEA–21 statutory provisions. A fewcommenters wanted this provision toapply to Federal RailroadAdministration (FRA) programs, as did

the original version of former part 23.However, FRA does not have specificstatutory authority for a DBE programparallel to the TEA–21 language. Onecommenter asked if the language sayingthat DBE requirements do not apply tocontracts without any DOT funding isinconsistent with Federal TransitAdministration (FTA) guidance onapplicability. While the structure of theFTA program is such that FTA funds arecommingled with local funds in manytransit authority contracts (e.g., anycontract involving FTA operatingassistance funds), to which DBErequirements would apply, a contractwhich is funded entirely with localfunds—and without any Federalfunds—would not be subject torequirements under this rule.

Section 26.5 What Do The Terms Usedin This Part Mean?

There were relatively few commentson the definitions proposed in theSNPRM. One commenter wanted tosubstitute the term ‘‘historicallyunderutilized business’’ for DBE. Giventhe continued use of the DBE term inCongressional consideration of theprogram, the continued use of the‘‘socially and economicallydisadvantaged individuals’’ language inthe statute, and the familiarity ofconcerned parties with the DBE term,we do not believe changing the termwould be a good idea.

A few commenters asked foradditional definitions or elaboration ofexisting definitions (e.g., ‘‘form ofarrangement,’’ ‘‘financial assistanceprogram,’’ ‘‘commercially usefulfunction’’). These terms are eitheralready defined sufficiently or are bestunderstood in context of the operationalsections in which they are embedded,and abstract definitions in this sectionwould not add much to anyone’s abilityto make the program work well.Consequently, we are not adding them.Otherwise the final rule adopts theSNPRM proposals for definitions withonly minor editorial changes.

The Department has added, for thesake of clarity and consistency withother Federal programs, definitions ofthe terms Alaskan native, Alaskannative corporation (ANC), Indian tribe,immediate family member, NativeHawaiian, Native Hawaiianorganization, principal place ofbusiness, primary industryclassification, and tribally-ownedconcern. These definitions are takenfrom the SBA’s new smalldisadvantaged business programregulation (13 CFR § 124.3). Thedefinitions of the designated groupsincluded in the definition of ‘‘socially


and economically disadvantagedindividual’’ also derive from the SBAregulations, as the Department’s DBEstatutes require. We believe these willbe useful terms of art in implementingthe DBE program.

A few commenters requesteddefinitions for the terms ‘‘race-conscious’’ and ‘‘race-neutral,’’ and wehave provided definitions. A race-conscious program is one that focuseson, and provides benefits only for,DBEs. The use of contract goals is theprimary example of a race-consciousmeasure in the DBE program. A race-neutral program is one that, whilebenefiting DBEs, is not solely focusedon DBE firms. For example, smallbusiness outreach programs, technicalassistance programs, and promptpayment clauses can assist a widevariety of small businesses, not justDBEs.

Section 26.7 What DiscriminatoryActions Are Forbidden?

One commenter wanted to addprohibitions of discrimination based onage, disability and religion. TheDepartment is not doing so, becausediscrimination on these grounds isalready prohibited by other statutes(e.g., the Americans with DisabilitiesAct with respect to disability). Also,statutes which form the basis for thisrule focus on race, color, national origin,and sex. Congress determined thatremedial action focused on these areasis necessary. These grounds fordiscrimination are also most relevant toproblems in the DBE program that havebeen alleged to exist (e.g., disparatetreatment of DBE certificationapplicants by race or sex). Someopponents of the program said that theDBE program discriminates against non-DBEs. However, the Departmentbelieves that the program isconstitutional and does not violateequal protection requirements. Areference to DOT Title VI regulationshas been deleted as unnecessary;otherwise, this provision is the same asin the SNPRM.

Section 26.9 How Does the DepartmentIssue Guidance and InterpretationsUnder This Part?

Commenters, most of whom wererecipients, focused on two issues in thissection. First, a majority of thecomments favored the ‘‘coordinationmechanism’’ concept for ensuringconsistent DOT guidance andinterpretations. The few that disagreedwith this approach did so out of aconcern that the mechanism would adddelays to the process. Thesecommenters favored additional training

or an 800 number hot line to speed upthe process.

We believe that proper coordinationof interpretations and guidance is vitalto the successful implementation of thisrule. As the preambles to the 1992 and1997 proposed rules mentioned,inconsistent implementation of part 23has been a continuing problem, whichhas been criticized by a GeneralAccounting Office report and which hascreated unnecessary difficulty forrecipients, contractors, and theDepartment itself. A process forensuring that the Department speakswith one voice on DBE implementationmatters, and for letting the public knowwhen DOT has spoken, will greatlyimprove the service we give ourcustomers.

We do not believe this coordinationprocess will result in significant delaysin providing guidance. Nor will itinhibit the ability of DOT staff andcustomers to communicate with oneanother. For example, the process doesnot apply to informal advice providedby staff to recipients or contractors overthe phone or in a letter or e-mail. It doesmaintain, however, the importantdistinction between informal staffassistance on one hand and a bindinginstitutional position on the other.

For clarity in the process, we havemodified the language of the rule text tomake clear that interpretations andguidance are binding, officialDepartmental positions if the Secretarysigns them or if the document includesa statement that they have beenreviewed and approved by the GeneralCounsel. The General Counsel willconsult fully with all concerned officesas part of this review process.

We intend to post significantguidance documents and interpretationson the Department’s web site to makethem widely and quickly available. Assome commenters suggested, we are alsocontinuing to consider forming anadvisory committee (or working groupof an existing committee) to facilitatecustomer input into DBE programmatters. This is separate from thecoordination mechanism, however,which is an internal DOT process.

The rule’s provisions regardingexemptions and waivers, previouslyfound in the SNPRM’s § 26.9 (c) and (d),are now included as a separate sectionat § 26.15.

Section 26.11 What Records doRecipients Keep and Report?

The Department asked, in theSNPRM, whether it would be advisableto have one standard reporting form forinformation about the DBE program.Currently, each operating

administration (OA) has its ownreporting form and requirements.Virtually all the commenters thataddressed this issue favored a single,DOT-wide reporting form. Commentersalso had a wide variety of suggestionsfor what data should be reported,formats, and retention periods.

The Department is adopting thesuggestion of having a single reportingform, which we believe will reduceadministrative burdens for recipients,particularly those who receive fundsfrom more than one OA. Because we donot want to delay the issuance of thisrule while a form is being developed,we are reserving the date on which thissingle form requirement will go intoeffect. We will take comments on thespecifics of reporting into account andconsult with interested parties as wedevise the form, which will bepublished subsequently in Appendix Bto this rule. The Appendix will alsoaddress the issues of reportingfrequency and record retention periods.Meanwhile, recipients will continue toreport as directed by the concernedOA(s), using existing reporting forms.

The rule is also adding a requirementthat recipients develop and maintain a‘‘bidders’’ list. The bidders list isintended to be a count of all firms thatare participating, or attempting toparticipate, on DOT-assisted contracts.The list must include all firms that bidon prime contracts or bid or quotesubcontracts on DOT-assisted projects,including both DBEs and non-DBEs.Bidders lists appear to be a promisingmethod for accurately determining theavailability of DBE and non-DBE firmsand the Department believes thatdeveloping bidders data will be usefulfor recipients. Creating and maintaininga bidders list will give recipientsanother valuable way to measure therelative availability of ready, willingand able DBEs when setting their overallgoals. (See § 26.45). We realize thatidentifying subcontractors, particularlynon-DBEs and all subcontractors thatwere unsuccessful in their attempts toobtain contracts, may well be a difficulttask for many recipients. Mindful of thatpotential burden, the rule will notimpose any procedural requirements forhow the data is collected. Recipients arefree to choose whether or not they wishto gather this data through their existingbidding and reporting processes.Recipients are encouraged to make useof all of the data already available tothem and all methods of reporting andcommunication with their contractingcommunity that they already have inplace. In addition, the Departmentsuggests that recipients consider using awidely publicized public notice or a


widely disseminated survey toencourage all firms that have bid orquoted contracts to make themselvesknown to recipients.

Once recipients have created the listof bidders, they will have to supplementthat information with the age of eachfirm (since establishment) and theannual gross receipts of the firm (or anaverage of its annual gross receipts).Recipients can gather this additionalinformation by sending a questionnaireto the firms on the list, or by any othermeans that the recipient believes willyield reliable information. Therecipient’s plan for how to create andmaintain the list and gather the requiredinformation must be included in its DBEprogram.

Section 26.13 What Assurances MustRecipients and Contractors Make?

There were few comments on thissection. Most of these supported theproposal. One comment suggestedspecific mention of prompt payment,but in view of the substantiverequirements on this subject, we do notbelieve such a mention is needed. Somecommenters favored requiringadditional public participation as part ofthe assurance for recipients. Again,given substantive provisions of this ruleconcerning public participation, we donot believe that repetition here isneeded. One commenter said thatincorporating the requirements of part26 in the contract was confusing, sincemany provisions of part 26 apply onlyto recipients. We have rewritten theassurance for contractors in response tothis concern, specifying that contractorsare responsible only for carrying out therequirements of part 26 that apply tothem.

Section 26.15 How Can RecipientsApply for Exemptions or Waivers?

There has been some confusion as tothis rule’s distinction betweenexemption and waiver. Put simply,exemptions are for unique situationsthat are most likely not to be eithergenerally applicable to all recipients orto have been contemplated in therulemaking process. If such a situationoccurs and it makes it impractical for aparticular recipient to comply with aprovision of part 26, the recipientshould apply for an exemption from thatprovision. The waiver provision, bycontrast, is not designed forextraordinary circumstances where arecipient may not be able to complywith part 26. Waiver is for a situationwhere a recipient believes that it canbetter accomplish the objectives of theDBE program through means other thanthe specific provisions of part 26.

There were a number of commentsabout the proposed program waiverprovision. Most commenters on thisissue favored the proposal, believing itcould add flexibility to the wayrecipients implement the DBE program.A few commenters were concerned thattoo liberal use of the waiver provisionmight undermine the goals of the rule.

The Department believes that thewaiver provision is an important aspectof the DBE program. The provisionensures that the Department and arecipient can work together to respondto any unique local circumstances.Recipients are encouraged to carefullyreview the circumstances in their ownjurisdictions to determine whatmechanisms are best suited to achievingcompliance with the overall objectivesof the DBE program. If a recipientbelieves it is appropriate to operate itsprogram differently from the way that aprovision of Subpart B or C provides,including, but not limited to, anyprovisions regarding administrativerequirements, overall or contract goals,good faith efforts or countingprovisions, it can apply for a waiver. Forexample, waiver requests could pertainto such subjects as the use of a race-conscious measure other than a contractgoal, different ways of counting DBEparticipation in certain industries, useof separate overall or contract goals toaddress demonstrated discriminationagainst specific categories of sociallyand economically disadvantagedindividuals, the use or wording ofassurances, differences in informationcollection requirements and methods,etc.

The Department will, of course,carefully review any applications forwaivers to make sure that innovativestate or local programs are able to meetthe objectives of the statutes andregulation. Decisions on waiver requestsare made by the Secretary. Thisauthority has not been delegated toother officials. The waiver provision,which the Department believes willhelp assist recipients to ‘‘narrowlytailor’’ the program to state and localcircumstances and ensurenondiscrimination, remains in the finalrule.

Section 26.21 Who Must Have a DBEProgram?

The only substantive commentconcerning this provision asked thatFederal Railroad Administration (FRA)programs be included. The Departmentis not including FRA programs underthis rule because FRA does not have aspecific DBE program statute parallel tothose covering the Federal AviationAdministration (FAA), FTA, and

FHWA. FRA could consider issuing arule similar to part 26 under its own,separate statutory authority. TheDepartment shortened paragraph (b)(1)to make it easier to understand. Within180 days of the effective date of thisrule, all recipients with existingprograms must submit revised programsto the relevant OA for approval. Theonly changes from existing programsthat recipients would have to make arechanges needed to accommodatedifferences between former part 23 andpart 26. Future new recipients would, ofcourse, submit a DBE program as part ofthe approval process for financialassistance.

Section 26.23 What is the Requirementfor a Policy Statement?

Section 26.25 What is the Requirementfor a Liaison Officer?

Section 26.27 What Efforts MustRecipients Make Concerning DBEFinancial Institutions?

There were no substantive commentsconcerning §§ 26.23–26.27, and theDepartment is adopting them asproposed.

Section 26.29 What Prompt PaymentMechanisms Must Recipients Have?

There was substantial comment onthe issue of prompt payment. A majorityof commenters supported the concept ofprompt payment provisions. Somerecipients pointed out that they alreadyhad prompt payment provisions on thebooks. DBEs generally supportedmandating prompt payment provisionsthough they, as well as othercommenters, recognized that slowpayment is a problem affecting manysubcontractors, not just DBEs. Some ofthese comments suggested makingprompt payment requirementsapplicable to subcontracts in general,not just DBE subcontracts. Somerecipients were concerned about gettingin the middle of disputes between primecontractors and subcontractors. Somecommenters wanted the Department tomandate prompt payment provisions,while others preferred that their use byrecipients remain optional.

Having considered the variety ofviews expressed on this subject, theDepartment believes that promptpayment provisions are an importantrace-neutral mechanism that can benefitDBEs and all other small businesses.Under part 26, all recipients mustinclude a provision in their contractsrequiring prime contractors to makeprompt payments to theirsubcontractors, DBE and non-DBE alike.It is clear that DBE subcontractors aresignificantly—and, to the extent that


they tend to be smaller than non-DBEs,disproportionately—affected by latepayments from prime contractors. Lackof prompt payment constitutes a veryreal barrier to the ability of DBEs tocompete in the marketplace. It isappropriate for the Department torequire recipients to take reasonablesteps to deal with this barrier. Werecognize that delayed payments do notaffect only DBE contractors; a promptpayment requirement applying to allsubcontracts is an excellent example ofa race-neutral measure that will assistDBEs, and we are therefore requiringthat recipients’ prompt paymentmechanisms apply to all subcontractson Federally-assisted contracts.

Paragraph (a) of this section requiresrecipients to put into their DBEprograms a requirement for a promptpayment contract clause. This clausewould appear in every prime contracton which there are subcontractingpossibilities, and it would obligate theprime contractor to pay subcontractorswithin a given number of days from thereceipt of each payment the recipientmakes to the prime contractor. Paymentis required only for satisfactorycompletion of the subcontractor’s work.The clause would also apply to thereturn of retainage from the prime to thesubcontractor. Retainage would have tobe returned within a given number ofdays from the time the subcontractor’swork had been satisfactorily completed,even if the prime contract had not yetbeen completed. A majority ofcommenters on the retainage issuefavored a requirement of this kind.

The number of days involved wouldbe selected by the recipient, subject toOA approval as part of the recipient’sDBE program. In approving these timeframes, the OAs will consider whetherthey are realistic and sufficiently brief toensure genuinely prompt payment.Recipients who already operate underprompt payment statutes may use theirexisting authority in implementing thisrequirement. It may be necessary to addto existing contract clauses in somecases (e.g., if existing prompt paymentrequirements do not cover retainage).

Paragraph (b) lists a series ofadditional measures that the regulationauthorizes, but does not require,recipients to use. These includealternative dispute resolution, holdingof payments to primes untilsubcontractors are paid, and othermechanisms that the recipient maydevise. All these mechanisms could bemade part of the recipient’s DBEprograms.

Section 26.31 What RequirementsPertain to the DBE Directory?

Recipients maintain directories listingcertified DBEs. The issue mostdiscussed by commenters on thissection was whether the directoryshould include material concerning thequalifications of the firm to do varioussorts of work. For example, has the firmbeen pre-qualified by the recipient? Canit do creditable work? What kinds ofwork does the firm prefer to do? Somecommenters also asked that thedirectory should list the geographicalareas in which the firm is willing towork. Other commenters opposed theidea of including this kind ofinformation in the directory.

The Department believes that thedirectory and the certification processare closely intertwined. The primarypurpose of the directory is to show theresults of the certification process.Consequently, the directory should listall firms that the recipient has certified,along with basic identifying informationfor the firm. Since certification underthis rule pertains to the various kinds ofwork a firm’s disadvantaged owners cancontrol, it is important to list thosekinds of work in the directory. Forexample, if a firm seeks to work in fieldsA, B, and C, but the recipient hasdetermined that its disadvantagedowners can control its operations onlywith respect to A and B, then thedirectory would recite that the firm iscertified to perform work as a DBE infields A and B.

The focus of the directory is intendedto be eligibility. A directory is a list offirms that have been certified as eligibleDBEs, with sufficient identifyinginformation to permit interested firms tocontact the DBEs. We do not intend toturn a recipient’s directory into acomprehensive business resourcemanual. For example, information aboutfirms’ qualifications, geographicalpreferences for work, performance trackrecord, capitalization, etc. are notrequired to be part of the directory.Some commenters favored includingone or more of these elements, but weare concerned that other businessinformation—however useful in its ownright—could clutter up the directoryand dilute its focus on certification.

Section 26.33 What Steps Must aRecipient Take to AddressOverconcentration of DBEs in CertainTypes of Work?

For some time, the Department hasheard allegations that DBEs areoverconcentrated in certain fields ofhighway construction work (e.g.,guardrail, fencing, landscaping, traffic

control, striping). The concernexpressed is that there are so manyDBEs in these areas that non-DBEs arefrozen out of the opportunity to work.In an attempt to respond to theseconcerns, the SNPRM asked forcomment on a series of options for‘‘diversification’’ mechanisms, variousincentives and disincentives designed toshift DBE participation to other types ofwork.

The Department received a great dealof comment on these proposals, almostall of it negative. There were fewcomments suggesting thatoverconcentration was a seriousproblem, and many comments said thatthe alleged problem was not real. SomeFTA and FAA recipients said that ifthere was a problem withoverconcentration, it was limited to thehighway construction program. As ageneral matter, recipients said that theproposed mechanisms were costly,cumbersome, and too prescriptive.

Prime contractors opposed theprovisions because they would make itmore difficult for them to find DBEswith which to meet their goals, whileDBEs opposed them because they feltthe provisions would penalize successand force them out of areas of businessin which they were experienced. Manycommenters suggested using outreach orbusiness development plans as ways ofassisting DBEs to move into additionalareas of work.

The Department does not have datafrom commenters or other sources tosupport a finding that‘‘overconcentration’’ is a serious,nationwide problem. However, as partof the narrow tailoring of the DBEprogram, we believe it would be usefulto give recipients the authority toaddress overconcentration problemswhere they may occur. In keeping withthe increased flexibility that this ruleprovides recipients, we give recipientsdiscretion to identify situations whereoverconcentration is unduly burdeningnon-DBE firms. If a recipient finds anarea of overconcentration, it would haveto devise means of addressing theproblem that work in their localsituations. Possible means of dealingwith the problem could includeassisting prime contractors to find DBEsin non-traditional fields or varying theuse of contract goals to lessen anyburden on particular types of non-DBEspecialty contractors. While recipientswould have to obtain DOT approval ofdeterminations of overconcentrationand measures for dealing with them, theDepartment is not prescribing anyspecific mechanisms for doing so.


Section 26.35 What Role do BusinessDevelopment and Mentor-ProtégéPrograms Have in the DBE Program?

In the SNPRM, both mentor-protégéprograms and business developmentprograms (BDPs) were cast as tools touse for diversification. They still may beused for that purpose, as noted in§ 26.33. However, the Departmentbelieves that they may have a broaderapplication, and their use in the finalrule is not limited to diversificationpurposes. BDPs, in particular, are goodexamples of race-neutral methodsrecipients can use to promote theparticipation of DBEs and other smallbusinesses in their contractingprograms.

There were few comments on theseprovisions. Recipients wantedflexibility, and suggested that thesekinds of programs should be optional.Their comments said that suchprograms were resource-intensive, andthat Federal financial assistance forthem would be welcome. Onecontractors’ organization offered its ownmentor-protégé plan as a model. A fewcomments voiced suspicion of mentor-protégé plans, on the basis that theyallowed fronts and frauds into theprogram.

The final rule makes the use of BDPsand mentor-protégé programs optionalfor recipients. An operatingadministration can direct a particularrecipient to institute a BDP, but BDPsare not mandatory across the board. Theoperating administration wouldnegotiate with the recipient beforemandating a BDP.

One feature added to this provisionallows recipients to establish a kind ofmini-graduation requirement for firmsthat voluntarily participate in BDPs.One of the purposes of a BDP is to equipDBE firms to compete in the marketoutside the DBE program. Therefore, arecipient could ask BDP participants toagree—as a condition of receiving BDPassistance—to agree to leave the DBEprogram after a certain number of years,or after certain business developmentobjectives had been achieved.

Standing alone, mentor-protégéprograms are not an adequate substitutefor the DBE program. While they can bean important tool to help selected firms,they cannot be counted on to level theplaying field for DBEs in general. Aneffective mentor-protégé programrequires close monitoring to guardagainst abuse, which further limits thenumber of DBEs they can assist. Evenwith these limits, a mentor-protégéprogram that has safeguards to preventlarge non-DBE firms from circumventingthe DBE program can be a useful

component of a recipient’s overallstrategy to ensure equal opportunitiesfor DBEs.

The final rule includes safeguardsintended to prevent the misuse ofmentor-protégé programs. Only firmsthat a recipient has already certified asDBEs (necessarily including adetermination that they are independentfirms) can participate as protégés. Thisis intended to preclude non-DBE firmsfrom creating captive DBE firms to serveas protégés. A non-DBE mentor firmcannot get credit for more than half itsgoal on any contract by using its ownprotégé. Moreover, a non-DBE mentorfirm cannot get DBE credit for using itsown protégé on more than every othercontract performed by the protégé. Thatis, if Mentor Firm X uses Protégé FirmY to perform a subcontract, X cannot getDBE credit for using Y on anothersubcontract until Y had first worked onan intervening prime contract orsubcontract with a different primecontractor.

To make mentor-protégé relationshipsfeasible, the rule provides that mentorsand protégés are not treated as affiliatesof one another for size determinationpurposes. Mentor-protégé programs andBDPs must be approved by theconcerned operating administrationbefore they take effect. Recipients whoalready have such programs in placewould make them part of their revisedDBE programs sent to the concerned OAwithin 180 days of the effective date ofpart 26.

Section 26.37 What Are a Recipient’sResponsibilities for Monitoring thePerformance of Other ProgramParticipants?

The few comments on this sectionasked for more detail and clarification.In the interest of flexibility, theDepartment is reluctant to beprescriptive in the matter of monitoringand enforcement mechanisms. What weare looking for is a strong and effectiveset of monitoring and complianceprovisions in each recipient’s DBEprogram. These mechanisms could bemost anything available to the recipientunder Federal, state, or local law (e.g.,liquidated damages provisions,responsibility determinations,suspension and debarment rules, etc.)

One of the main purposes of theseprovisions is to make sure that DBEsactually perform work committed tothem at contract award. The results thatrecipients must measure consist ofpayments actually made to DBEs, notjust promises at the award stage. Credittoward goals can be awarded only whenpayments (including, for example, thereturn of retainage payments) are

actually made to DBEs. Under the finalrule, recipients would keep a runningtally of the extent to which, on eachcontract, performance had matchedpromises. Prime contractors whoseperformance fell short of originalcommitments would be subject to thecompliance mechanisms the recipienthad made applicable.

Section 26.41 What Is the Role of theStatutory 10 Percent Goal in ThisProgram?

This is a new section, intended toexplain what role the 10 percentstatutory goal plays in the DBE program.Under former part 23, the 10 percentfigure derived from the statute had arole in the setting of overall goals byrecipients. For example, if recipientshad a goal of less than 10 percent, therule required them to make a specialjustification.

This section makes clear that the 10percent goal is an aspirational goal thatapplies to the Department ofTransportation on a national level, notto individual recipients. It is a goal thatthe Department can use to evaluate itsoverall national success in achieving theobjectives that Congress has establishedfor this program. However, the national10 percent goal is not tied to recipients’goal-setting decisions. Recipients setgoals based on what will achieve a levelplaying field for DBEs in their ownprograms, without regard to the nationalgoal. Recipients are not required to settheir overall or contract goals at 10percent or any other particular level.Recipients are no longer required tomake a special justification if theiroverall goals are less than 10 percent.

As discussed in connection with theCongressional debate on the TEA–21DBE provision, Congress viewedflexibility concerning the statutory 10percent goal as an important feature ofnarrow tailoring and made clear that itwas setting a national goal, not a goal forany individual recipient. TheDepartment wants to ensure that stateand local programs have sufficientflexibility to implement their programsin a narrowly tailored way. This sectionis part of the Department’s effort towardthat end.

Section 26.43 Can Recipients UseQuotas or Set-Asides as Part of ThisProgram?

The DBE program has often beenlabeled as a ‘‘quota’’ or ‘‘set-aside’’program, especially, though notexclusively, by its opponents. This labelis, and always has been, incorrect.Fifteen years ago, in the preamble to theDepartment’s first rule implementing aDBE statute, the Department carefully


specified that neither quotas nor set-asides were required (see 48 FR 33437–38; July 21, 1983). This remains truetoday. However, in light of Adarand andthis year’s Congressional debates on theDBE statutes, we believe this pointdeserves additional emphasis. Thisregulation prohibits quotas under anycircumstances and makes clear that set-asides can only be used as a m

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