Disadvantaged Business Enterprise
The certified “Disadvantaged Business Enterprise” (“DBE”) is an integral part of the construction industry in California and the United States as a whole. Billions of dollars in construction funds are allocated solely to DBEs in California every year. The DBE program is a creation of the U.S. Department of Transportation (“DOT”) and other federal agencies. Under successive acts of Congress, the DOT and its divisions are required to ensure that state and local public agencies which receive project funding from them establish DBE participation “goals” for women, certain racial or ethnic grounds, and other “disadvantaged” types of businesses. DOT’s definition of a DBE and its requirements for DBE participation in contracts is controlling whenever DOT funds are used in a construction project.
Receiving DOT funds in California
California counties, cities and other public agencies receive DOT funds and other federal agency funds for their construction projects. As a condition of receiving these funds, the state entities are required to comply with the applicable federal goals for the use of DBEs. In theory the DBE program should create a great deal of opportunity for Disadvantaged Business Enterprises. But that is not always the case. In this article, we focus on what a DBE is and how a business becomes certified as a DBE.
What is a Disadvantaged Business Enterprise?
The DOT defines a Disadvantaged Business Enterprise as a for-profit small business that is at least 51% owned and controlled by socially and economically disadvantaged individuals. The disadvantaged individual besides owning at least 51% interest in the firm must control management and daily business operations of the company.
What is a Socially Disadvantaged Individual?
“Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” It is presumed that women are socially disadvantaged. It is also presumed that African Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, and Subcontinent Asian Americans (ie. Indian, Pakistani, Sri Lankan and Bangladeshi) are socially disadvantaged. In California, disabled veterans are also included in the definition of DBE and California requires at least 3% disabled veteran participation in public construction projects. Individuals who do not fall into any of these categories may be determined to be socially disadvantaged on a case by case basis.
What is an Economically Disadvantaged Entity?
The DOT’s definition of economically disadvantaged is any owner who has a net worth of less than $1.32 million. That would seem to exclude a great number of contractors and suppliers because in most cases the equity in their business and home alone would far exceed $1.32 million. However the rule announced by the DOT at 49 Code of Federal Regulations 26.67 provides that an agency certifying a DBE must exclude from its calculation the individual’s ownership interest in the applicant firm. And the certifying agency must exclude an individual’s equity in his or her primary residence. Finally the individual’s assets held in vested pension plans, IRAs, 401(k)’s or other retirement savings account must be excluded from the calculation except for that amount that would be left over after taxes and penalties were paid if the account were to be immediately distributed. Therefore, an owner of a DBE could have a net worth of considerably more than $1.32 million and still be considered economically disadvantaged.
The DBE Firm Must Be a Small Business
The DBE firm must be a small business as defined by the Small Business Administration. The firm (including its affiliates) may not have annual gross revenue in excess of $23,980,000 in the three previous years before applying for certification as a DBE. It is not enough that the socially and economically owner meet the DBE qualifications, the individual must really be the person in control of the management of the company. The person may not be controlled by an affiliate non-DBE company.
How does a business become certified as a DBE?
The California Unified Certification Program (CUCP) provides certification services to small, minority and women businesses that seek to participate in the DBE Program. The CUCP web site contains instructions and information on how to apply to become a DBE. CUCP allows applicants to only apply once for certification that will be honored by all recipients in the state.
The CUCP provides a roster of certifying agencies. In Southern California, there are three agencies: Caltrans, the City of Los Angeles and LA Metro. The website provides the contact information for each of the certifying agencies. It is important to contact the agencies and speak with someone to determine if that particular agency will certify the business. They each restrict coverage to certain geographical areas because a physical inspection of the business is part of the certification process.
If the contractor or material supplier goes through the application process and is successful in obtaining its DBE certification through the California Unified Certification Program, the contractor is registered in the CUCP as a certified DBE. The CUCP maintains a database of all certified DBEs which is accessible to all businesses, contractors and public entities throughout California. In theory this provides the new DBE with exposure to potentially millions of dollars of contracts.
Conclusion
In our next article, we will discuss whether the goals behind the DBE statutes and regulations to level the playing field for the socially and economically disadvantaged are actually being met in practice and how contractors can gauge the actual benefit of being certified as a DBE.
Here at Cummins & White, LLP, we routinely advise and assist small businesses with questions on the DBE process and qualifications. If you have specific questions about your company and the role of DBE subcontractors or materials suppliers (or any other questions about the DBE program), please contact me by email at efarrell@cwlawyers.com or by phone at (949) 852-1800.
