DOT Announces a Major Policy Shift for Disadvantaged Business Enterprise Programs

The U.S. Department of Transportation (DOT) issued an interim final rule on Oct. 3 that changes the Disadvantaged Business Enterprise (DBE) and Airport Concession Disadvantaged Business Enterprise (ACDBE) programs. The new rule, which applies to recipients of certain federal funding from DOT, reflects a fundamental shift in decades of federal policy. Effective immediately, the interim final rule removes race and sex-based presumptions from the definitions of “socially and economically disadvantaged individual.” Now, the owner of a business benefitting from these programs must demonstrate on a case-by-case basis that he or she meets certain factors identified in the new rule.  

Before we discuss those factors, it is important to explain how we got here. The Fourteenth Amendment to the U.S. Constitution guarantees equal protection of the laws to all persons. This means that both racial classifications and sex-based classifications are presumptively invalid. Yet, history reveals that, at times, all men and women have not been treated with equal dignity under the law. Recognizing our shortcomings, Congress enacted certain laws in the 1980s that mandated that DOT treat women and members of certain racial and ethnic groups as presumptively “disadvantaged.”

In 2024, the U.S. District Court for the Eastern District of Kentucky noted the “good intentions” of Congress in trying to remedy past wrongs. But the court found that the presumption violated the Constitution’s guarantee of equal protection and issued an injunction that applied to only the named plaintiffs. Mid-American Milling Co. v. U.S. Department of Transportation, 2024 WL 4267183 (E.D. Ky. Sept. 23, 2024).

After that decision, DOT determined the DBE presumption also violated the Due Process Clause of the Fifth Amendment. In light of the Kentucky decision and DOT’s own determination, the agency issued the interim final rule, which removed the presumption of disadvantage.

Now, the owner of the business seeking a DBE designation will have to demonstrate that he or she meets the criteria described in 46 CFR § 26.67. As a result, the owner must:

• Demonstrate social and economic disadvantage affirmatively based on his or her own experiences and circumstances within American society, and without regard to race or sex.
• Provide the certifier with a personal narrative that establishes the existence of a disadvantage based on individual proof showing specific instances of economic hardship, systemic barriers, and denied opportunities that blocked the owner’s progress or success in education, employment, or business—including getting financing on terms available to another person who had advantages and was similarly situated.
• State how and to what extent the obstacles caused the owner economic harm, including a full description of the type and magnitude of harm. And show that the owner is disadvantaged economically relative to others who are not disadvantaged but are similarly situated.
• Provide a personal net worth statement and any other financial information the owner considers relevant.

These new criteria must be applied immediately, but some delays are expected during the transition to the new criteria. The interim final rule requires a reevaluation of every firm previously certified as a DBE or ACDBE.  

The DBE certification process is administered by unified certification programs (UCP) at the state or regional level. The UCP will need to recertify DBEs and ACDBEs that meet the new criteria.

The interim rule does attempt to address active projects with current DBE obligations. First, until the UCP completes its reevaluation process, a contractor cannot count any DBE or ACDBE participation towards their DBE or ACDBE goals. Second, to ensure fairness to contractors, the interim final rule also suspends goal reporting and compliance monitoring until the UCP completes its reevaluation process. These two provisions suggest that existing contracts should remain in effect and there should be no penalty for missing established goals. Still, the interim rule creates significant uncertainty about how DBE goals on active projects will be handled. DOT will likely need to issue additional clarity for active projects.

For construction contracts effective on or after Oct.3, recipients of federal funds are prohibited from including DBE contract goals or concessions until the pertinent UCP completes its reevaluation process. Some state departments of transportation have suspended their DBE goals for future projects while they perform the required recertification.

Owners should immediately:

• Connect with their UCP to understand how the recertification process will work.
• Collect evidence to demonstrate disadvantage in accordance with the new criteria.
• Review current contracts to determine whether there are any DBE clauses that may be affected by rule changes.
• Review upcoming solicitations, which may have far different DBE participation requirements than you would normally see.

While most UCPs have not issued interim guidance just yet, recertification will undoubtedly get underway soon. Therefore, it is a good idea to get started on gathering the evidence you need to obtain your recertification.

Should you need any assistance in recertification or have questions regarding the impact of this new rule, our construction lawyers across the South are here to answer questions and help navigate the re-certification process.

Please contact Anthony J. Gambino, Jr. or any member of the Phelps Construction/Design team if you have questions or need advice or guidance.